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FORM 10-Q



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-31579



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HYDRIL COMPANY

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 95-2777268                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|3300 North Sam Houston Parkway East Houston, Texas             |  | 77032-3411                       
|(Address of principal executive offices)                       |  | (Zip Code)                       

Registrants telephone number, including area code (281) 449-2000



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Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to the filing requirements for at least the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large Accelerated
Filer  x    Accelerated Filer ̈Non-accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

Shares outstanding at October 31, 2006:

Common stock, $.50 par value, 19,246,613 shares outstanding

Class B common stock, $.50 par value, 3,068,305 shares outstanding



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##### Table of Contents

HYDRIL COMPANY

INDEX

PART IFINANCIAL INFORMATION



|                                                                                                                                           |  |     
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                                           | 
|Item 1. Financial Statements                                                                                                               |  | Page
|                                                                                                                                           | 
|Consolidated Balance SheetsSeptember 30, 2006 (unaudited) and December 31, 2005                                                           |  | 4   
|                                                                                                                                           | 
|Unaudited Consolidated Statements of OperationsFor the Three and Nine Months Ended September 30, 2006 and 2005                            |  | 6   
|                                                                                                                                           | 
|Unaudited Consolidated Statements of Changes in Stockholders Equity and Comprehensive IncomeFor the Nine Months Ended September 30, 2006 |  | 7   
|                                                                                                                                           | 
|Unaudited Consolidated Statements of Cash FlowsFor the Nine Months Ended September 30, 2006 and 2005                                      |  | 8   
|                                                                                                                                           | 
|Notes to Unaudited Consolidated Financial Statements                                                                                       |  | 9   
|                                                                                                                                           | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 23  
|                                                                                                                                           | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 33  
|                                                                                                                                           | 
|Item 4. Controls and Procedures                                                                                                            |  | 33  
|                                                                                                                                           | 
|PART IIOTHER INFORMATION                                                                                                                  |  |     
|                                                                                                                                           | 
|Item 1A. Risk Factors                                                                                                                      |  | 33  
|                                                                                                                                           | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                        |  | 47  
|                                                                                                                                           | 
|Item 6. Exhibits                                                                                                                           |  | 47  

* * *



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Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance,
including our business strategy and product development plans, and involve known and unknown risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to:



| |  |  | the impact of changes in oil and natural gas prices and worldwide and domestic economic conditions on drilling activity and demand for and pricing of Hydrils products,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risks associated with fixed-price contracts,
| | - |  | ------------------------------------------------



| |  |  | the loss of distribution or change to distribution channels or methods or inventory practices for premium connections in the U.S. and Canada,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition from steel mills,
| | - |  | -----------------------------



| |  |  | limitations on the availability of pipe for threading,
| | - |  | ------------------------------------------------------



| |  |  | the impact of imports of tubular goods and of international and domestic trade laws,
| | - |  | ------------------------------------------------------------------------------------



| |  |  | factors that could cause our results to vary significantly from quarter to quarter,
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the consolidation of end-users,
| | - |  | -------------------------------



| |  |  | intense competition in our industry,
| | - |  | ------------------------------------



| |  |  | the risks associated with international operations,
| | - |  | ---------------------------------------------------



| |  |  | the ability to attract and retain skilled labor and
| | - |  | ---------------------------------------------------



| |  |  | Hydrils ability to successfully develop new technologies and products and maintain and increase its market share.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Please read RISK FACTORS in Item 1A of Part II of this report for more information about many of these risks and uncertainties. These factors
may cause our companys or our industrys actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, could, expects, intends, plans, anticipated, believes,
estimated, potential, or the negative of these terms or other comparable terminology.

These statements are only
projections based on anticipated industry activity. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.



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HYDRIL COMPANY

Part I, Item 1: Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Information)



|                                                                      |  |                    |          |   |                   |   |          |  
|--------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                      |  | September 30, 2006 |          |   | December 31, 2005 |  
|                                                                      |  | (unaudited)        |          |   |                   |  
|CURRENT ASSETS:                                                       |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                             |  | $                  | 179,742  |   |                   | $ | 65,145   |  
|Investments and marketable securities                                 |  |                    | 9,254    |   |                   |   | 108,084  |  
|Receivables:                                                          |  |                    |          |   |                   |   |          |  
|Trade, less allowance for doubtful accounts: 2006, $1,037; 2005, $759 |  |                    | 60,777   |   |                   |   | 67,523   |  
|Contract costs and estimated earnings in excess of billings           |  |                    | 13,439   |   |                   |   | 8,803    |  
|Other                                                                 |  |                    | 1,821    |   |                   |   | 1,878    |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Total receivables                                                     |  |                    | 76,037   |   |                   |   | 78,204   |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Inventories:                                                          |  |                    |          |   |                   |   |          |  
|Finished goods                                                        |  |                    | 45,942   |   |                   |   | 28,917   |  
|Work-in-process                                                       |  |                    | 19,559   |   |                   |   | 18,828   |  
|Raw materials                                                         |  |                    | 13,822   |   |                   |   | 9,901    |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Total inventories                                                     |  |                    | 79,323   |   |                   |   | 57,646   |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Deferred tax asset                                                    |  |                    | 9,792    |   |                   |   | 11,390   |  
|Other current assets                                                  |  |                    | 4,969    |   |                   |   | 3,669    |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Total current assets                                                  |  |                    | 359,117  |   |                   |   | 324,138  |  
|                                                                      |  |                    |          |   |                   |   |          |  
|PROPERTY:                                                             |  |                    |          |   |                   |   |          |  
|Land and improvements                                                 |  |                    | 24,021   |   |                   |   | 21,846   |  
|Buildings and improvements                                            |  |                    | 55,655   |   |                   |   | 52,620   |  
|Machinery and equipment                                               |  |                    | 188,358  |   |                   |   | 178,145  |  
|Construction-in-progress                                              |  |                    | 8,997    |   |                   |   | 5,004    |  
|                                                                      |  |                    |          |   |                   |   |          |  
|Total                                                                 |  |                    | 277,031  |   |                   |   | 257,615  |  
|Less accumulated depreciation and amortization                        |  |                    | (161,338 | ) |                   |   | (152,477 | )
|                                                                      |  |                    |          |   |                   |   |          |  
|Property, net                                                         |  |                    | 115,693  |   |                   |   | 105,138  |  
|                                                                      |  |                    |          |   |                   |   |          |  
|OTHER LONG-TERM ASSETS:                                               |  |                    |          |   |                   |   |          |  
|Investments                                                           |  |                    |         |   |                   |   | 8,387    |  
|Deferred tax asset                                                    |  |                    | 256      |   |                   |   | 212      |  
|Other assets                                                          |  |                    | 15,497   |   |                   |   | 12,687   |  
|                                                                      |  |                    |          |   |                   |   |          |  
|TOTAL                                                                 |  | $                  | 490,563  |   |                   | $ | 450,562  |  
|                                                                      |  |                    |          |   |                   |   |          |  

See notes to unaudited consolidated financial statements



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##### Table of Contents

HYDRIL COMPANY

Part I, Item 1: Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Information)



|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                        |  | September 30, 2006 |          |   | December 31, 2005 |  
|                                                                                                                                                                        |  | (unaudited)        |          |   |                   |  
|CURRENT LIABILITIES:                                                                                                                                                    |  |                    |          |   |                   |   |         |  
|Accounts payable                                                                                                                                                        |  | $                  | 35,990   |   |                   | $ | 23,443  |  
|Billings in excess of contract costs and estimated earnings                                                                                                             |  |                    | 43,848   |   |                   |   | 4,482   |  
|Accrued liabilities                                                                                                                                                     |  |                    | 28,037   |   |                   |   | 26,791  |  
|Income taxes payable                                                                                                                                                    |  |                    | 17,341   |   |                   |   | 8,661   |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|Total current liabilities                                                                                                                                               |  |                    | 125,216  |   |                   |   | 63,377  |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                  |  |                    |          |   |                   |   |         |  
|Deferred tax liability                                                                                                                                                  |  |                    | 9,594    |   |                   |   | 9,579   |  
|Other                                                                                                                                                                   |  |                    | 17,884   |   |                   |   | 16,771  |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|Total long-term liabilities                                                                                                                                             |  |                    | 27,478   |   |                   |   | 26,350  |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|CONTINGENCIES (Note 6)                                                                                                                                                  |  |                    |          |   |                   |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                                                                   |  |                    |          |   |                   |   |         |  
|Capital stock:                                                                                                                                                          |  |                    |          |   |                   |   |         |  
|Preferred stock  authorized, 10,000,000 shares of $1 par value; none issued or outstanding                                                                             |  |                    |         |   |                   |   |        |  
|Common stock  authorized 75,000,000 shares of $.50 par value; 20,742,820 and 20,182,531 shares issued at September 30, 2006 and
December 31, 2005, respectively        |  |                    | 10,372   |   |                   |   | 10,091  |  
|Class B common stock  authorized, 32,000,000 shares of $.50 par value; 3,116,855 and 3,479,920 shares issued at September 30, 2006 and
December 31, 2005, respectively |  |                    | 1,558    |   |                   |   | 1,740   |  
|Additional paid-in capital                                                                                                                                              |  |                    | 81,974   |   |                   |   | 79,356  |  
|Retained earnings                                                                                                                                                       |  |                    | 347,127  |   |                   |   | 279,789 |  
|Deferred compensation                                                                                                                                                   |  |                    |         |   |                   |   | (6,980  | )
|Accumulated other comprehensive loss                                                                                                                                    |  |                    | (3,161   | ) |                   |   | (3,161  | )
|Less treasury stock, at cost; 1,544,757 and 0 shares at September 30, 2006 and December 31, 2005, respectively                                                          |  |                    | (100,001 | ) |                   |   |        |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|Total stockholders equity                                                                                                                                              |  |                    | 337,869  |   |                   |   | 360,835 |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  
|TOTAL                                                                                                                                                                   |  | $                  | 490,563  |   |                   | $ | 450,562 |  
|                                                                                                                                                                        |  |                    |          |   |                   |   |         |  

See notes to unaudited consolidated financial statements



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HYDRIL COMPANY

Part I, Item 1: Unaudited Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)



|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | ---- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                            |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                            |  | 2006                            |            |                                | 2005 |   | 2006       |  |   | 2005      
|REVENUE                                     |  | $                               | 117,312    |                                |      | $ | 92,974     |  | $ | 373,486    |   |  | $ | 263,398   
|COST OF SALES                               |  |                                 | 71,904     |                                |      |   | 51,690     |  |   | 223,288    |   |  |   | 146,242   
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|GROSS PROFIT                                |  |                                 | 45,408     |                                |      |   | 41,284     |  |   | 150,198    |   |  |   | 117,156   
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|SELLING, GENERAL & ADMINISTRATION EXPENSES: |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Engineering                                 |  |                                 | 3,796      |                                |      |   | 2,844      |  |   | 10,799     |   |  |   | 8,852     
|Sales and marketing                         |  |                                 | 6,310      |                                |      |   | 5,239      |  |   | 18,475     |   |  |   | 15,672    
|General and administration                  |  |                                 | 7,552      |                                |      |   | 6,026      |  |   | 24,078     |   |  |   | 18,361    
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Total                                       |  |                                 | 17,658     |                                |      |   | 14,109     |  |   | 53,352     |   |  |   | 42,885    
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|OPERATING INCOME                            |  |                                 | 27,750     |                                |      |   | 27,175     |  |   | 96,846     |   |  |   | 74,271    
|                                            |  |                                 |            |                               
|LOSS FROM UNCONSOLIDATED ENTITIES           |  |                                 | (29        | )                              |      |   |           |  |   | (43        | ) |  |   |          
|                                            |  |                                 |            |                               
|INTEREST INCOME                             |  |                                 | 2,222      |                                |      |   | 959        |  |   | 5,583      |   |  |   | 2,563     
|OTHER INCOME (EXPENSE), NET                 |  |                                 | (81        | )                              |      |   | 1,318      |  |   | (250       | ) |  |   | 1,065     
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|INCOME BEFORE INCOME TAXES                  |  |                                 | 29,862     |                                |      |   | 29,452     |  |   | 102,136    |   |  |   | 77,899    
|PROVISION FOR INCOME TAXES                  |  |                                 | 10,196     |                                |      |   | 9,840      |  |   | 34,798     |   |  |   | 26,026    
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|NET INCOME                                  |  | $                               | 19,666     |                                |      | $ | 19,612     |  | $ | 67,338     |   |  | $ | 51,873    
|                                            |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|EARNINGS PER SHARE:                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|BASIC                                       |  | $                               | 0.85       |                                |      | $ | 0.83       |  | $ | 2.86       |   |  | $ | 2.21      
|DILUTED                                     |  | $                               | 0.84       |                                |      | $ | 0.81       |  | $ | 2.82       |   |  | $ | 2.16      
|WEIGHTED AVERAGE SHARES OUTSTANDING:        |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|BASIC                                       |  |                                 | 23,179,508 |                                |      |   | 23,550,685 |  |   | 23,535,230 |   |  |   | 23,456,702
|DILUTED                                     |  |                                 | 23,521,607 |                                |      |   | 24,121,067 |  |   | 23,915,332 |   |  |   | 23,993,313

See notes to unaudited consolidated financial statements



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##### Table of Contents

HYDRIL COMPANY

Part I, Item 1: Unaudited Consolidated Statements of Changes in Stockholders Equity

And Comprehensive Income

(In Thousands, Except Share Amounts)



|                                                                                         |  |              |  |                      |        |        |                          |   |        |                  |       |                      |  |   |                                   |   |  |               |         |  |       |        |   |  |   |        |   |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------ |  | -------------------- | ------ | ------ | ------------------------ | - | ------ | ---------------- | ----- | -------------------- |  | - | --------------------------------- | - |  | ------------- | ------- |  | ----- | ------ | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                         |  | Common Stock |  | Class B Common Stock |        |        | AdditionalPaid-InCapital |   |        | RetainedEarnings |       | DeferredCompensation |  |   | AccumulatedOtherComprehensiveLoss |   |  | TreasuryStock |         |  | Total |       
|                                                                                         |  | Shares       |  | Amount               |        | Shares |                          |   | Amount |                  |       |                      |  |   |                                   |  
|Balance, December 31, 2005                                                               |  | 20,182,531   |  | $                    | 10,091 |        | 3,479,920                |   |        | $                | 1,740 |                      |  | $ | 79,356                            |   |  | $             | 279,789 |  | $     | (6,980 | ) |  | $ | (3,161 | ) |  | $ |         |   |  | $ | 360,835  |  
|                                                                                         |  |              |  |                      |        |        |                          |   |        |                  |       |                      |  |   |                                   |   |  |               |         |  |       |        |   |  |   |        |   |  |   |          |   |  |   |          |  
|Net Income                                                                               |  |             |  | $                    |       |        |                         |   |        | $                |      |                      |  | $ |                                  |   |  | $             | 67,338  |  | $     |       |   |  | $ |       |   |  | $ |         |   |  | $ | 67,338   |  
|                                                                                         |  |              |  |                      |        |        |                          |   |        |                  |       |                      |  |   |                                   |   |  |               |         |  |       |        |   |  |   |        |   |  |   |          |   |  |   |          |  
|Issuance of Common stock-employee stock purchase plan and exercise of stock options      |  | 171,081      |  |                      | 86     |        |                         |   |        |                  |      |                      |  |   | 4,074                             |   |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 4,160    |  
|Tax benefit on option exercises                                                          |  |             |  |                      |       |        |                         |   |        |                  |      |                      |  |   | 2,614                             |   |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 2,614    |  
|Treasury shares purchased at cost                                                        |  |             |  |                      |       |        |                         |   |        |                  |      |                      |  |   |                                  |   |  |               |        |  |       |       |   |  |   |       |   |  |   | (100,001 | ) |  |   | (100,001 | )
|Reclassification of deferred compensation in accordance with the adoption of SFAS 123(R) |  |             |  |                      |       |        |                         |   |        |                  |      |                      |  |   | (13,560                           | ) |  |               |        |  |       | 6,980  |   |  |   |       |   |  |   |         |   |  |   | (6,580   | )
|Stock-based compensation                                                                 |  |             |  |                      |       |        |                         |   |        |                  |      |                      |  |   | 3,722                             |   |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 3,722    |  
|Conversion of Class B Common stock to Common stock                                       |  | 363,065      |  |                      | 182    |        | (363,065                 | ) |        |                  | (182  | )                    |  |   |                                  |   |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   |         |  
|Vesting of Restricted units                                                              |  | 26,143       |  |                      | 13     |        |                         |   |        |                  |      |                      |  |   | (812                              | ) |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   | (799     | )
|Awards of Restricted units                                                               |  |             |  |                      |       |        |                         |   |        |                  |      |                      |  |   | 6,580                             |   |  |               |        |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 6,580    |  
|                                                                                         |  |              |  |                      |        |        |                          |   |        |                  |       |                      |  |   |                                   |   |  |               |         |  |       |        |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, September 30, 2006                                                              |  | 20,742,820   |  | $                    | 10,372 |        | 3,116,855                |   |        | $                | 1,558 |                      |  | $ | 81,974                            |   |  | $             | 347,127 |  | $     |       |   |  | $ | (3,161 | ) |  | $ | (100,001 | ) |  | $ | 337,869  |  
|                                                                                         |  |              |  |                      |        |        |                          |   |        |                  |       |                      |  |   |                                   |   |  |               |         |  |       |        |   |  |   |        |   |  |   |          |   |  |   |          |  

See notes to unaudited consolidated financial statements



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##### Table of Contents

HYDRIL COMPANY

Part I, Item 1: Unaudited Consolidated Statements of Cash Flows

(In Thousands)



|                                                                                  |  |                                |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2006                           |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                                |          |   |      |   |         |  
|Net income                                                                        |  | $                              | 67,338   |   |      | $ | 51,873  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |         |  
|Stock-based compensation                                                          |  |                                | 3,722    |   |      |   | 1,124   |  
|Depreciation and amortization                                                     |  |                                | 11,016   |   |      |   | 10,108  |  
|Deferred income taxes                                                             |  |                                | 2,146    |   |      |   | 5,264   |  
|Gain on sale of real estate holdings not used in operations                       |  |                                |         |   |      |   | (2,199  | )
|Provision for doubtful accounts                                                   |  |                                | 264      |   |      |   | (207    | )
|Equity loss in unconsolidated affiliates                                          |  |                                | 43       |   |      |   |        |  
|Change in operating assets and liabilities:                                       |  |                                |          |   |      |   |         |  
|Receivables                                                                       |  |                                | 6,539    |   |      |   | (3,714  | )
|Contract costs and estimated earnings in excess of billings                       |  |                                | (4,636   | ) |      |   | 1,742   |  
|Inventories                                                                       |  |                                | (21,677  | ) |      |   | (19,055 | )
|Other current and noncurrent assets                                               |  |                                | (2,401   | ) |      |   | 4,376   |  
|Accounts payable                                                                  |  |                                | 12,547   |   |      |   | 677     |  
|Billings in excess of contract costs and estimated earnings                       |  |                                | 39,366   |   |      |   | 479     |  
|Other accrued liabilities                                                         |  |                                | 447      |   |      |   | 746     |  
|Income taxes payable                                                              |  |                                | 8,680    |   |      |   | 1,987   |  
|Other long-term liabilities                                                       |  |                                | 1,113    |   |      |   | 1,140   |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                | 124,507  |   |      |   | 54,341  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|NET CASH FROM INVESTING ACTIVITIES:                                               |  |                                |          |   |      |   |         |  
|Purchase of held-to-maturity investments                                          |  |                                |         |   |      |   | (17,605 | )
|Proceeds from held-to-maturity investments                                        |  |                                | 6,693    |   |      |   | 23,750  |  
|Purchase of available-for-sale investments                                        |  |                                | (73,071  | ) |      |   | (85,500 | )
|Proceeds from available-for-sale investments                                      |  |                                | 173,595  |   |      |   | 39,349  |  
|Capital expenditures                                                              |  |                                | (22,153  | ) |      |   | (10,690 | )
|Purchase of a product line                                                        |  |                                |         |   |      |   | (3,640  | )
|Proceeds from the sale of real estate not used in operations                      |  |                                |         |   |      |   | 2,936   |  
|Other, net                                                                        |  |                                | (1,267   | ) |      |   | (2,606  | )
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash (used in) provided by investing activities                               |  |                                | 83,797   |   |      |   | (54,006 | )
|                                                                                  |  |                                |          |   |      |   |         |  
|NET CASH FROM FINANCING ACTIVITIES:                                               |  |                                |          |   |      |   |         |  
|Net proceeds from issuance of common stock                                        |  |                                | 152      |   |      |   | 264     |  
|Net proceeds from exercise of stock options                                       |  |                                | 4,008    |   |      |   | 6,268   |  
|Purchase of treasury stock                                                        |  |                                | (100,001 | ) |      |   |        |  
|Excess tax benefits from stock option exercises                                   |  |                                | 2,134    |   |      |   |        |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash (used in) provided by financing activities                               |  |                                | (93,707  | ) |      |   | 6,532   |  
|                                                                                  |  |                                |          |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                                | 114,597  |   |      |   | 6,867   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  |  |                                | 65,145   |   |      |   | 51,733  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |  | $                              | 179,742  |   |      | $ | 58,600  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |  |                                |          |   |      |   |         |  
|Income taxes paid:                                                                |  |                                |          |   |      |   |         |  
|Domestic                                                                          |  | $                              | 8,181    |   |      | $ | 2,806   |  
|Foreign                                                                           |  |                                | 13,573   |   |      |   | 11,622  |  

See notes to unaudited consolidated financial statements



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##### Table of Contents

Hydril Company

Part I, Item 1: Notes to Unaudited Consolidated Financial Statements

Note 1  BASIS OF PRESENTATION

Principles of
Consolidation- The consolidated financial statements include the accounts of Hydril Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates.

Interim Presentation- The
accompanying consolidated interim financial statements and disclosures have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and in the opinion of management reflect all
adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation in all material respects of the financial position and results for the interim periods. The December 31, 2005 consolidated balance sheet was
derived from our audited financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of results to be expected for the full year.

Investments The Company invests excess cash in various securities and money market mutual funds rated as the highest quality by a
nationally recognized rating agency.

The Company had investment securities classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. At September 30, 2006, the Company held no available-for-sale
securities and at December 31, 2005, the Company held $100,525,000 in available-for-sale securities. The fair value of these securities as of December 31, 2005 approximated the carrying value. The realized and unrealized gains
and losses related to these available-for-sale investments were immaterial to the results of operations.

Additionally, the Company has
investments classified as held-to-maturity that are measured at amortized cost in accordance with SFAS 115. Management has the positive intent and ability to hold those securities to maturity. As of September 30, 2006 and
December 31, 2005, the Company held $9,254,000 and $15,946,000, respectively of corporate investment securities classified as held-to-maturity. Contractual maturities of these securities at September 30, 2006 were all
within one year of maturity.



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##### Table of Contents

Note 2  STOCK-BASED COMPENSATION

On January 1, 2006 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)) issued by the Financial Accounting Standards Board (FASB) in December 2004. SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method on the
grant date (with limited exceptions) and recognize such expense in the consolidated financial statements over the requisite employee service period. Prior to January 1, 2006, under the disclosure-only provisions of SFAS 123, Accounting
for Stock-Based Compensation (SFAS 123), the Company applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting for its stock option plans.
Accordingly, prior to January 1, 2006, the Company did not recognize any stock-based compensation expense in its income statement for stock options, as the exercise price was equal to the market price of the Companys stock on the date of
grant. However, the Company did recognize stock-based compensation expense for its restricted stock and restricted stock unit awards. Awards of restricted stock, (time-vesting) restricted stock units and performance-based restricted stock units made
prior to, but not yet vested as of January 1, 2006, will continue to be expensed. Compensation expense for restricted stock and restricted stock units is based on the market value of the underlying stock at the date of grant.

In its adoption of SFAS 123(R), the Company elected the modified prospective transition method. Under this transition method, in the case of stock option
awards made prior to January 1, 2006, stock-based compensation expense for subsequent periods includes compensation expense for all such awards not yet vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original pro forma provisions of SFAS 123. The fair value of each such stock option award was estimated on the date of grant using a Black-Scholes valuation model. Under the modified prospective transition method, financial
statements for prior periods are not restated.

The Company recognizes stock-based compensation expense on a straight-line basis over the
requisite service period of the award. Stock-based compensation expense recognized in the income statement beginning January 1, 2006 is based on awards ultimately expected to vest and is reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, when necessary, in subsequent periods if actual forfeitures differ from those estimates. The impact of forfeitures on the compensation expense recognized for the three and nine months
ended September 30, 2006 was estimated based on historical experience. In the Companys pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred. As a result of the
adoption of SFAS 123(R), the deferred compensation recorded in stockholders equity as of January 1, 2006, of $6,980,000 was reclassified to reduce additional paid-in capital.

Beginning January 1, 2006, stock-based compensation expense is comprised of (i) compensation expense arising from amortization of stock-based
awards made prior to, but not yet vested as of January 1, 2006, as discussed above and (ii) compensation expense arising from amortization of stock-based compensation awards granted on or after January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123(R). Total



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##### Table of Contents

stock-based compensation expense recognized under SFAS 123(R) for the three and nine months ended September 30, 2006
was $949,000 and $2,419,000, respectively, net of forfeitures and net of tax. See table below for 2005 pro forma information.

On
November 10, 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (FSP 123(R)-3). The alternative transition method includes
simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The Company has calculated the APIC pool using the method outlined in SFAS 123(R) and has elected
not to adopt the alternative method outlined in FSP 123(R)-3.

The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS 123 for the three and nine months ended September 30, 2005:



|                                                                                                                                |  |                                     |        |   |                                     |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------------- | - | ------ | -
|(in thousands, except per share data)                                                                                           |  | Three Months EndedSeptember 30,2005 |        |   | Nine Months Ended September 30,2005 |  
|Net income, as reported                                                                                                         |  | $                                   | 19,612 |   |                                     | $ | 51,873 |  
|Add: Total stock-based employee compensation awards included in reported net income, net of tax                                 |  |                                     | 340    |   |                                     |   | 749    |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                                     | (769   | ) |                                     |   | (2,095 | )
|                                                                                                                                |  |                                     |        |   |                                     |   |        |  
|Pro forma net income                                                                                                            |  | $                                   | 19,183 |   |                                     | $ | 50,527 |  
|                                                                                                                                |  |                                     |        |   |                                     |   |        |  
|Earnings per share:                                                                                                             |  |                                     |        |   |                                     |   |        |  
|Basic-as reported                                                                                                               |  | $                                   | 0.83   |   |                                     | $ | 2.21   |  
|Basic-pro forma                                                                                                                 |  | $                                   | 0.81   |   |                                     | $ | 2.15   |  
|                                                                                                                                |  |                                    
|Diluted-as reported                                                                                                             |  | $                                   | 0.81   |   |                                     | $ | 2.16   |  
|Diluted-pro forma                                                                                                               |  | $                                   | 0.80   |   |                                     | $ | 2.11   |  

Stock Options

Total compensation expense related to stock options for the three and nine months ended September 30, 2006 was $310,000 and $954,000, respectively, net of forfeitures and tax and is included in General and
Administration expense in our Consolidated Statement of Operations. Total unrecognized compensation cost as of September 30, 2006 related to stock options is approximately $1,256,000, net of tax, and is expected to be recognized over
approximately the next 3.3 years. The Company has not capitalized any stock-based compensation cost as part of inventory or fixed assets during the nine months ended September 30, 2006 and 2005.



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##### Table of Contents

A summary of the status of the Companys stock option activity, and related information for the nine
months ended September 30, 2006 is presented below:



|                                  |  |          |   |  |                                 |       |                                            |     |                                        |   |       
|--------------------------------- |  | -------- | - |  | ------------------------------- | ----- | ------------------------------------------ | --- | -------------------------------------- | - | ------
|Options                           |  | Shares   |   |  | Weighted - AverageExercisePrice |       | Weighted - AverageRemainingContractualTerm |     | AggregateIntrinsic Value(in thousands)
|Outstanding at December 31, 2005  |  | 660,343  |   |  | $                               | 24.89 |                                            |     |                                        |   |       
|Granted                           |  |         |   |  |                                 |      |                                            |     |                                        |   |       
|Exercised                         |  | (167,831 | ) |  |                                 | 23.88 |                                            |     |                                        |   |       
|Cancelled                         |  |         |   |  |                                 |      |                                            |     |                                        |   |       
|                                  |  |          |   |  |                                 |       |                                            |     |                                        |   |       
|Outstanding at September 30, 2006 |  | 492,512  |   |  | $                               | 25.23 |                                            | 6.3 |                                        | $ | 15,380
|                                  |  |          |   |  |                                 |       |                                            |     |                                        |   |       
|Exercisable at September 30, 2006 |  | 189,660  |   |  | $                               | 24.40 |                                            | 6.1 |                                        | $ | 6,080 
|                                  |  |          |   |  |                                 |       |                                            |     |                                        |   |       

A summary of the status of the Companys nonvested stock options as of September 30,
2006 is presented below:



|                                |  |          |   |  |                                       |      
|------------------------------- |  | -------- | - |  | ------------------------------------- | -----
|Nonvested Shares                |  | Shares   |   |  | Weighted-AverageGrant-Date Fair Value
|Nonvested at December 31, 2005  |  | 417,208  |   |  | $                                     | 10.81
|Granted                         |  |         |   |  |                                       |     
|Vested                          |  | (114,356 | ) |  |                                       | 11.40
|Forfeited                       |  |         |   |  |                                       |     
|                                |  |          |   |  |                                       |      
|Nonvested at September 30, 2006 |  | 302,852  |   |  | $                                     | 10.59
|                                |  |          |   |  |                                       |      

In 2005, stock options were accounted for under APB 25 with the related expense reported in the
financial footnotes on a pro forma basis under the disclosure-only provisions of SFAS 123. For the three and nine months ended September 30, 2005, pro forma stock-based compensation expense related to stock options was $429,000 and $1,346,000,
respectively, net of tax.

Cash received from option exercises for the nine months ended September 30, 2006 and 2005 was
$4,008,000 and $6,268,000, respectively. In accordance with SFAS 123(R), the consolidated statement of cash flows reports the $2,134,000 in excess tax benefit from stock-based compensation as a cash in-flow from Financing Activities. The
total income tax benefit related to stock option exercises was $2,614,000 and $3,773,000 for the nine months ended September 30, 2006 and 2005, respectively.

Restricted Stock and Restricted Stock Units

Total compensation expense related to restricted stock units and
performance-based restricted stock units for the three and nine months ended September 30, 2006 was $639,000 and $1,465,000, respectively, net of forfeitures and tax, and is included in General and



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##### Table of Contents

Administration expense in our Consolidated Statement of Operations. Total unrecognized compensation cost
as of September 30, 2006 related to restricted stock units and performance-based restricted stock units is approximately $7,349,000, net of tax, and is expected to be recognized over the next 4.6 years.

A summary of the status of the Companys nonvested restricted stock and restricted stock units as of September 30, 2006 is presented below:



|                                |  |         |   |  |                                       |      
|------------------------------- |  | ------- | - |  | ------------------------------------- | -----
|Nonvested Shares                |  | Shares  |   |  | Weighted-AverageGrant-Date Fair Value
|Nonvested at December 31, 2005  |  | 245,054 |   |  | $                                     | 38.37
|Granted                         |  | 87,500  |   |  |                                       | 75.20
|Vested                          |  | (36,772 | ) |  |                                       | 27.17
|Forfeited                       |  |        |   |  |                                       |     
|                                |  |         |   |  |                                       |      
|Nonvested at September 30, 2006 |  | 295,782 |   |  | $                                     | 50.66
|                                |  |         |   |  |                                       |      

For the three and nine months ended September 30, 2005, total stock-based compensation
expense related to restricted stock and restricted stock units was $340,000 and $749,000, respectively, net of tax. Compensation expense relating to restricted stock and restricted stock units was included, and will continue to be included, in
reported net income, as required by accounting standards.

On June 1, 2006, the Company granted a total of 65,300 restricted stock
units to officers and key employees. A stock unit represents the right to receive a share of common stock on the date the restrictions on the unit lapse. The restrictions on restricted stock units lapse over a five year period with sixty percent of
the units vesting on the third anniversary of the date of grant and twenty percent vesting on each of the fourth and fifth anniversary dates of the grant. In the event a grantee terminates employment with the Company, any restricted stock units
remaining subject to restrictions are forfeited. Restricted unit awards result in the recognition of deferred compensation. Deferred compensation is a contra-equity account with an offset to additional paid-in capital and is amortized to operating
expense over the vesting period of the award.

In addition, on June 1, 2006 the Company granted a total of 22,200 performance-based
restricted stock units to executive officers. The vesting of these awards is dependent upon whether, and the extent to which, specified performance objectives relating to Return on Capital Employed (ROCE) are attained for the three-year
period ending December 31, 2008. ROCE is the Companys average annual after-tax operating income divided by average capital employed (total assets and short-term debt, including current maturities of long-term debt minus current
liabilities). None of these restricted stock units will vest unless the Company achieves a minimum ROCE specified by the Board of Directors for the three-year period and the ROCE achieved is equal to or greater than the average ROCE for a specified
peer group of companies. If these two minimum thresholds are met, then between twenty percent and one hundred percent of the units will vest upon completion of the three-year period, depending on the Companys ROCE relative to that of the peer
group for that period. The units will vest completely if the minimum thresholds are met and the Companys ROCE is in the top quartile of its peer group for the period. Restricted stock units settle automatically in shares of common stock on a
one-for-one basis upon vesting.



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##### Table of Contents

Director Deferred Share Units

On June 1, 2006, each of the Companys non-employee directors received a grant of 2,000 deferred share units, totaling 14,000 units for all
non-employee directors as a group. Each deferred share unit represents one hypothetical share of common stock. The deferred share units vest and become payable three years from the date of grant if the director remains a member of the Companys
Board of Directors at such time, or earlier under specified circumstances. Upon vesting, the deferred share units are settled in cash at the fair market value of common stock on a one-for-one basis. Compensation expense is recognized over the
vesting period based on the fair market value of the underlying stock at each reporting period.

Note 3  TREASURY STOCK

In March 2006, the Companys Board of Directors authorized the repurchase of up to $100 million of the Companys common stock. At
September 30, 2006, the Company had repurchased the full amount authorized. A total of 1,544,757 shares were repurchased for an aggregate price of approximately $100 million, including the repurchase of 1,191,432 shares during the third quarter
of 2006 for an aggregate price of approximately $75 million. All of the shares repurchased pursuant to the Board authorization through September 30, 2006, are held as treasury stock. The Company records treasury stock purchases under the cost
method whereby the entire cost of the acquired stock is recorded as treasury stock.

On November 9, the Board of Directors authorized
the repurchase of an additional $150 million of the Companys common stock. Subject to market considerations, the Company may repurchase additional shares in the open market or in privately negotiated transactions based on its ongoing capital
requirements, expected cash flows and regulatory restraints. Repurchases are expected to be funded with current cash, cash equivalents and short-term investments. Repurchases may be suspended at any time.



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##### Table of Contents

Note 4  PRODUCT WARRANTY LIABILITY

The change in the aggregate product warranty liability is as follows for the three and nine months ended September 30:



|                                                  |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                  |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|(in thousands)                                    |  | 2006                            |       |   | 2005                           |   |       | 2006 |  |   | 2005  |  
|Beginning balance                                 |  | $                               | 1,520 |   |                                | $ | 1,924 |      |  | $ | 1,552 |   |  | $ | 2,341 |  
|Claims paid                                       |  |                                 | (65   | ) |                                |   | (136  | )    |  |   | (247  | ) |  |   | (409  | )
|Additional warranty charged (credited) to expense |  |                                 | 96    |   |                                |   | (204  | )    |  |   | 246   |   |  |   | (348  | )
|                                                  |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Ending balance                                    |  | $                               | 1,551 |   |                                | $ | 1,584 |      |  | $ | 1,551 |   |  | $ | 1,584 |  
|                                                  |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  

Note 5  LONG-TERM CONTRACTS

The components of long-term contracts as of September 30, 2006 and December 31, 2005 consist of the following:



|                                                                          |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands)                                                            |  | September 30,2006 |         |   | December 31,2005 |  
|Costs and estimated earnings on uncompleted contracts                     |  | $                 | 56,342  |   |                  | $ | 19,321  |  
|Less: billings to date                                                    |  |                   | (86,751 | ) |                  |   | (15,000 | )
|                                                                          |  |                   |         |   |                  |   |         |  
|Excess of billings over costs and estimated earnings                      |  | $                 | (30,409 | ) |                  | $ | 4,321   |  
|                                                                          |  |                   |         |   |                  |   |         |  
|Included in the accompanying balance sheets under the following captions: |  |                   |         |   |                  |   |         |  
|Contract costs and estimated earnings in excess of billings               |  | $                 | 13,439  |   |                  | $ | 8,803   |  
|Billings in excess of contract costs and estimated earnings               |  |                   | (43,848 | ) |                  |   | (4,482  | )
|                                                                          |  |                   |         |   |                  |   |         |  
|Total                                                                     |  | $                 | (30,409 | ) |                  | $ | 4,321   |  
|                                                                          |  |                   |         |   |                  |   |         |  

Note 6  CONTINGENCIES

The Company is involved in legal proceedings arising in the ordinary course of business. In the opinion of management these matters are such that their outcome will not have a material adverse effect on the financial
position or results of operations of the Company.

As previously disclosed, the Company has been identified as a potentially responsible
party at a waste disposal site near Houston, Texas. Based on the number of other potentially responsible parties, the total estimated site cleanup costs and its estimated share of such costs, the Company continues to believe this matter will not
materially affect its results of operation or financial condition.



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##### Table of Contents

The Company has agreed to guarantee half of the total outstanding borrowings of its premium connection
Indian joint venture, an unconsolidated entity of which it owns 50%, up to a maximum of $3,018,000 by issuing irrevocable standby letters of credit. As of September 30, 2006, the total amount of borrowings of the joint venture was $4,111,000,
of which $2,055,000 was subject to the Companys guarantee. The Company does not expect this guarantee to have a material adverse effect on its financial condition or results of operations.

Note 7  LETTERS OF CREDIT

The Companys
banking institutions currently issue letters of credit on the Companys behalf based on its credit worthiness. The letters of credit vary in amount with maturities ranging from November 2006 to March 2011. At September 30, 2006, there was
approximately $12,311,000 outstanding in letters of credit comprised of approximately $8,506,000 of performance bonds related to customers orders and approximately $3,018,000 of irrevocable letters of credit issued to guarantee the borrowings
of its premium connection Indian joint venture. See Note 6, Contingencies.

Note 8  EARNINGS PER SHARE

The Company has presented basic and diluted income per share (EPS) on the unaudited consolidated statement of operations. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive EPS is based on the weighted average number of shares outstanding during each period
plus the assumed exercise of dilutive stock options and vesting of restricted stock and restricted stock units, less the number of treasury shares from the assumed exercise proceeds using the average market price for the Companys common stock
for each of the periods presented. When potentially dilutive securities are anti-dilutive, they are not included in dilutive EPS.



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##### Table of Contents

The following table summarizes the computation of basic and diluted net income per share:



|                                            |  |           |        |                       |        |                    |   |     
|------------------------------------------- |  | --------- | ------ | --------------------- | ------ | ------------------ | - | ----
|(in thousands except per share data)        |  | NetIncome |        | WeightedAverageShares |        | Earnings Per Share
|Three months ended September 30, 2006       |  |           |        |                       |        |                    |   |     
|Basic net income                            |  | $         | 19,666 |                       | 23,180 |                    | $ | 0.85
|Effect of dilutive share-based compensation |  |           |       |                       | 342    |                    |   |    
|                                            |  |           |        |                       |        |                    |   |     
|Diluted net income                          |  | $         | 19,666 |                       | 23,522 |                    | $ | 0.84
|                                            |  |           |        |                       |        |                    |   |     
|Three months ended September 30, 2005       |  |           |        |                       |        |                    |   |     
|Basic net income                            |  | $         | 19,612 |                       | 23,551 |                    | $ | 0.83
|Effect of dilutive share-based compensation |  |           |       |                       | 570    |                    |   |    
|                                            |  |           |        |                       |        |                    |   |     
|Diluted net income                          |  | $         | 19,612 |                       | 24,121 |                    | $ | 0.81
|                                            |  |           |        |                       |        |                    |   |     
|Nine months ended September 30, 2006        |  |           |        |                       |        |                    |   |     
|Basic net income                            |  | $         | 67,338 |                       | 23,535 |                    | $ | 2.86
|Effect of dilutive share-based compensation |  |           |       |                       | 380    |                    |   |    
|                                            |  |           |        |                       |        |                    |   |     
|Diluted net income                          |  | $         | 67,338 |                       | 23,915 |                    | $ | 2.82
|                                            |  |           |        |                       |        |                    |   |     
|Nine months ended September 30, 2005        |  |           |        |                       |        |                    |   |     
|Basic net income                            |  | $         | 51,873 |                       | 23,457 |                    | $ | 2.21
|Effect of dilutive share-based compensation |  |           |       |                       | 536    |                    |   |    
|                                            |  |           |        |                       |        |                    |   |     
|Diluted net income                          |  | $         | 51,873 |                       | 23,993 |                    | $ | 2.16
|                                            |  |           |        |                       |        |                    |   |     

Note 9  OTHER INCOME AND EXPENSE

Other expense for the three months ended September 30, 2006 was $81,000 compared to other income of $1,318,000 for the three months ended
September 30, 2005. The quarter ended September 30, 2005 included a $2,199,000 gain recorded from the sale of real estate not used in operations, as well as an increase in environmental reserves of $662,000 on other non-operational real
estate assets.

Note 10  EMPLOYEE BENEFITS

The Company has a defined benefit plan and post-retirement health and life benefits which are described in detail in Note 6 EMPLOYEE BENEFITS under Item 8 of our Annual Report on Form 10-K for the
year-ended December 31, 2005.



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The table below shows the amount of estimated net periodic benefit costs under each plan for the three
and nine months ended September 30:



|                                             |  |                                 |      |   |                                         |   |      |      |  |   |      |   |  |   |      |  
|-------------------------------------------- |  | ------------------------------- | ---- | - | --------------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                             |  | Defined Benefit Plan            |      |   | Post-RetirementHealth and Life Benefits |  
|                                             |  | Three MonthsEnded September 30, |      |   | Three Months Ended September 30,        |  
|(in thousands)                               |  | 2006                            |      |   | 2005                                    |   |      | 2006 |  |   | 2005 |  
|Components of net periodic benefit cost:     |  |                                 |      |   |                                         |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                 |  | $                               |     |   |                                         | $ |     |      |  | $ | 15   |   |  | $ | 14   |  
|Interest cost                                |  |                                 | 487  |   |                                         |   | 480  |      |  |   | 80   |   |  |   | 82   |  
|Expected return on plan assets               |  |                                 | (465 | ) |                                         |   | (461 | )    |  |   |     |   |  |   |     |  
|Amortization of prior service cost (benefit) |  |                                 | 4    |   |                                         |   | 4    |      |  |   | (122 | ) |  |   | (122 | )
|Amortization of net loss                     |  |                                 | 35   |   |                                         |   | 4    |      |  |   |     |   |  |   |     |  
|                                             |  |                                 |      |   |                                         |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                    |  | $                               | 61   |   |                                         | $ | 27   |      |  | $ | (27  | ) |  | $ | (26  | )
|                                             |  |                                 |      |   |                                         |   |      |      |  |   |      |   |  |   |      |  



|                                             |  |                                 |        |   |                                         |   |        |      |  |   |      |   |  |   |      |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | --------------------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                             |  | Defined Benefit Plan            |        |   | Post-RetirementHealth and Life Benefits |  
|                                             |  | Nine Months Ended September 30, |        |   | Nine Months Ended September 30,         |  
|(in thousands)                               |  | 2006                            |        |   | 2005                                    |   |        | 2006 |  |   | 2005 |  
|Components of net periodic benefit cost:     |  |                                 |        |   |                                         |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                 |  | $                               |       |   |                                         | $ |       |      |  | $ | 45   |   |  | $ | 42   |  
|Interest cost                                |  |                                 | 1,461  |   |                                         |   | 1,440  |      |  |   | 240  |   |  |   | 246  |  
|Expected return on plan assets               |  |                                 | (1,395 | ) |                                         |   | (1,383 | )    |  |   |     |   |  |   |     |  
|Amortization of prior service cost (benefit) |  |                                 | 12     |   |                                         |   | 12     |      |  |   | (366 | ) |  |   | (366 | )
|Amortization of net loss                     |  |                                 | 105    |   |                                         |   | 12     |      |  |   |     |   |  |   |     |  
|                                             |  |                                 |        |   |                                         |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                    |  | $                               | 183    |   |                                         | $ | 81     |      |  | $ | (81  | ) |  | $ | (78  | )
|                                             |  |                                 |        |   |                                         |   |        |      |  |   |      |   |  |   |      |  

Note 11  SEGMENT AND RELATED INFORMATION

In accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company has identified the
following reportable segments: Premium Connection and Pressure Control.

Hydril is engaged worldwide in engineering, manufacturing and
marketing of premium connection and pressure control products for oil and gas drilling and production. The Company sells its products to steel pipe distributors, major and independent, domestic and international oil and gas companies and drilling
contractors. The Companys products are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh conditions are typical for
deepwater, deep-formation and horizontal or extended reach oil and gas wells.



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The Companys premium connection segment manufactures premium connections that are used in drilling
environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deepwater, deep-formation and horizontal or extended
reach wells. Hydril applies premium threaded connections to tubulars owned by its customers and purchases pipe in certain international markets for threading and resale. Hydril manufactures premium threaded connections and provides services at
facilities located in Bakersfield, California; Westwego, Louisiana; Houston, Texas; Nisku, Alberta, and Dartmouth, Nova Scotia, Canada; Maharashtra, India; Batam, Indonesia; Veracruz, Mexico; Warri, Nigeria and Aberdeen, Scotland.

The Companys pressure control segment manufactures a broad range of pressure control equipment used in oil and gas drilling and well completion
typically employed in harsh environments. The Companys pressure control products are primarily safety devices that control and contain fluid and gas pressure during drilling, completion and maintenance in oil and gas wells. The Company also
provides aftermarket replacement parts, repair and field services for its installed base of pressure control equipment. Hydril manufactures pressure control products at two plant locations in Houston, Texas and one in New Mills, England.

The accounting policies of the segments are the same as those described in Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES under
Item 8 of our Annual Report on Form 10-K for the year-ended December 31, 2005 filed with the Securities and Exchange Commission. The Company evaluates segment performance based on operating income or loss.



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Financial data for the business segments for the three and nine months ended September 30, 2006 and
2005 is as follows:



|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30 |  
|(in thousands)                |  | 2006                            |         |   | 2005                          |   |        | 2006 |  |   | 2005    |  
|Revenue                       |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Premium Connection            |  | $                               | 63,785  |   |                               | $ | 62,928 |      |  | $ | 226,756 |   |  | $ | 173,340 |  
|Pressure Control              |  |                                 | 53,527  |   |                               |   | 30,046 |      |  |   | 146,730 |   |  |   | 90,058  |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total                         |  | $                               | 117,312 |   |                               | $ | 92,974 |      |  | $ | 373,486 |   |  | $ | 263,398 |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Operating income (loss)       |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Premium Connection            |  | $                               | 18,691  |   |                               | $ | 22,974 |      |  | $ | 74,801  |   |  | $ | 61,270  |  
|Pressure Control              |  |                                 | 14,484  |   |                               |   | 8,628  |      |  |   | 38,458  |   |  |   | 26,006  |  
|Corporate Administration      |  |                                 | (5,425  | ) |                               |   | (4,427 | )    |  |   | (16,413 | ) |  |   | (13,005 | )
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total                         |  | $                               | 27,750  |   |                               | $ | 27,175 |      |  | $ | 96,846  |   |  | $ | 74,271  |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Depreciation and amortization |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Premium Connection            |  | $                               | 2,444   |   |                               | $ | 2,181  |      |  | $ | 7,073   |   |  | $ | 6,300   |  
|Pressure Control              |  |                                 | 859     |   |                               |   | 797    |      |  |   | 2,503   |   |  |   | 2,312   |  
|Corporate Administration      |  |                                 | 405     |   |                               |   | 490    |      |  |   | 1,440   |   |  |   | 1,496   |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total                         |  | $                               | 3,708   |   |                               | $ | 3,468  |      |  | $ | 11,016  |   |  | $ | 10,108  |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Capital expenditures          |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Premium Connection            |  | $                               | 3,775   |   |                               | $ | 3,379  |      |  | $ | 11,593  |   |  | $ | 8,949   |  
|Pressure Control              |  |                                 | 3,504   |   |                               |   | 458    |      |  |   | 8,974   |   |  |   | 1,474   |  
|Corporate Administration      |  |                                 | 549     |   |                               |   | 89     |      |  |   | 1,586   |   |  |   | 267     |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total                         |  | $                               | 7,828   |   |                               | $ | 3,926  |      |  | $ | 22,153  |   |  | $ | 10,690  |  
|                              |  |                                 |         |   |                               |   |        |      |  |   |         |   |  |   |         |  

Note 12  RECENT ACCOUNTING PROUNOUNCEMENTS

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R). SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006. The purpose of SFAS No. 158 is to improve the overall financial
statement presentation of pension and other postretirement plans, but does not impact the determination of net periodic benefit cost or measurement of plan assets or obligations. SFAS 158 requires companies to recognize the over or under funded
status of the plan as an asset or liability as measured by the difference between the fair value of the plan assets and the benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a
component of accumulated other comprehensive income (loss). Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than as of the end of their fiscal year, however, this provision is not effective for companies
until fiscal years ending after December 15, 2008. The Company has a defined benefit pension plan covering substantially all of its U.S. employees. Effective December 31, 2001, this plan was frozen and no additional benefits have been
accrued under this plan since that date. We are currently assessing the impact of SFAS 158 on our consolidated financial position and results of operations.



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In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value
Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. This
pronouncement applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years. We are currently assessing the impact of SFAS 157 on our consolidated financial position and results of operations.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108) regarding
the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The
interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after
November 15, 2006. We do not anticipate the adoption to have a material effect on the Companys previously issued financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are
currently assessing the impact of FIN 48 on our consolidated financial position and results of operations.

In May 2005, the FASB issued
Statement of Financial Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB statement No. 3. SFAS 154 replaces APB No. 20,
Accounting Changes and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements and provides guidance on the accounting and reporting of accounting changes and error corrections. The statement applies to
all voluntary changes in accounting principles as well as all changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006. The adoption of SFAS 154 did not have a material effect on the Companys results of operations
or financial condition.

In December 2004, the FASB issued SFAS 123(R), Share-Based Payment. The Company adopted SFAS 123
(R) effective January 1, 2006. See additional discussion of SFAS 123 (R) in Note 2, Stock-Based Compensation.

In
November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting for abnormal amounts of



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idle facility expense, freight, handling costs and wasted material. Paragraph 5 of Accounting Research Bulletin
(ARB) 43, Chapter 4 Inventory Pricing, previously stated that . . . under certain circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to
require treatment as current-period charges . . . SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS 151 requires that the
allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. We adopted SFAS No. 151 on January 1, 2006. The adoption of SFAS 151 did not have a material effect on the
Companys results of operations or financial condition.



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Part I, Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of Hydrils historical results of operations and financial condition should be read in conjunction with Hydrils unaudited consolidated financial statements and notes thereto included elsewhere in this
report and the audited consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in Hydrils Annual Report on Form 10-K for the year
ended December 31, 2005.

OVERVIEW

Hydril Company is engaged worldwide in engineering, manufacturing and marketing premium connection and pressure control products used for oil and gas drilling and production. Hydril applies premium threaded
connections to tubulars owned by its customers and purchases pipe in certain international markets for threading and resale. Our premium connections are used in drilling environments where extreme pressure, temperature, corrosion and mechanical
stress are encountered, as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deep-formation, deepwater and horizontal or extended reach wells. Our pressure control products are primarily safety devices
that control and contain fluid and gas pressure during drilling, completion and maintenance of oil and gas wells in these same environments. We also provide aftermarket replacement parts, repair and field services for our installed base of pressure
control equipment. These products and services are required on a recurring basis because of the impact on original equipment from the extreme conditions in which pressure control products are used.

Demand for our products and services is cyclical and substantially dependent on the activity levels in the oil and gas industry and our customers
willingness to spend capital on the exploration and development of oil and gas reserves. The level of these capital expenditures is highly sensitive to current and expected oil and gas prices, which have historically been categorized by significant
volatility. Generally, increasing oil and gas prices, usually referred to as commodity prices, result in increased oil and gas exploration and production, which translates into greater demand for oilfield products and services.
Conversely, falling commodity prices generally result in reduced demand for oilfield products and services. Historically, changes in budgets and activity levels by oil and gas exploration and production companies have lagged significant movements in
commodity prices.

Premium Connections

Premium connections join sections of well casing, production tubing and drill pipe used in various stages of drilling and production. Our premium connection products are marketed primarily to exploration and production company operators,
who are the end-users. The premium connection market is driven by the level of worldwide drilling activity, in particular by the number of rigs drilling at target depths greater than 15,000 feet and the number of rigs drilling offshore. These depths
require substantially more premium connections than shallower wells. However, the rate of consumption varies widely among markets based on specific geological formations, customer history and preference, and available alternatives.



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In North America, the primary indicators of the premium connection market are the number of rigs drilling
to greater than 15,000 feet and the number of rigs drilling in the Gulf of Mexico. Internationally, while the total international rig count is a general indicator of the premium connection market, spending on exploration and production is typically
spread unevenly between various regions and can be subject to significant volatility. There are many variables, including political and civil unrest, which may adversely impact the level of drilling activity in particular countries or regions. In
addition, our international presence is concentrated in particular geographic regions which may not always correspond to where drilling activity is heaviest. If we are affected by conditions that exist in only specific markets, our premium
connections results may differ relative to movements in the international rig count. See Part II-Item 1A-RISK FACTORS: Intense competition in our industry could result in reduced profitability and loss of market share for us
and A material or extended decline in expenditures by the oil and gas industry, due to a decline in oil and gas prices or other economic factors, would reduce our revenue.

The following table shows the average rig count for rigs drilling at target depths greater than 15,000 feet in the United States, the average number of
rigs under contract in the Gulf of Mexico and the average international rig count for the last five quarters:



|              |  |                                                  |  |                                               |  |                                   
|------------- |  | ------------------------------------------------ |  | --------------------------------------------- |  | ----------------------------------
|              |  | Average UnitedStates Rig CountOver 15,000 ft (1) |  | Average GulfOf Mexico Rigs Under Contract (2) |  | AverageInternational Rig Count (3)
|Quarter Ended |  | Number of Rigs                                   |  | Number of Rigs                                |  | Number of Rigs                    
|09/30/2005    |  | 196                                              |  | 130                                           |  | 855                               
|12/31/2005    |  | 182                                              |  | 128                                           |  | 872                               
|03/31/2006    |  | 204                                              |  | 130                                           |  | 896                               
|06/30/2006    |  | 208                                              |  | 132                                           |  | 913                               
|09/30/2006    |  | 210                                              |  | 124                                           |  | 941                               



---

|(1) | Average rig count calculated by Hydril using weekly data published by Smith International.
|--- | ------------------------------------------------------------------------------------------

|(2) | Average rigs under contract calculated by Hydril using weekly data published by ODS-Petrodata Group.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Average international rig count calculated by Hydril using monthly data published by Baker Hughes Incorporated. The international rig count includes data for Europe, the Middle
East, Africa, Latin America and Asia Pacific, and excludes data for China, Canada, Iran, the former Soviet Union, Sudan and the United States.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pressure Control

Pressure control products include a broad spectrum of equipment and parts required for outfitting new
drilling rigs and upgrading and maintaining existing rigs. We sell our pressure control products primarily to drilling contractors for use in oil and gas drilling and to a lesser



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extent to exploration and production companies for oil and gas production. The main factors that affect sales of pressure
control capital equipment products are the level of construction of new drilling rigs and the rate at which existing drilling rigs are refurbished. Demand for our pressure control aftermarket replacement parts, repair and field services primarily
depends upon the level of worldwide offshore drilling activity as well as the average U.S. land rig count. The following table shows the average worldwide offshore rigs under contract and the average U.S. land rig count over the last five quarters:



|              |                |                                                 |                |                                       
|------------- | -------------- | ----------------------------------------------- | -------------- | --------------------------------------
|Quarter Ended |                | Average WorldwideOffshoreRigs UnderContract (1) |                | Average UnitedStates Land RigCount (2)
|              | Number of Rigs |                                                 | Number of Rigs
|09/30/2005    |                | 571                                             |                | 1,330                                 
|12/31/2005    |                | 568                                             |                | 1,396                                 
|03/31/2006    |                | 581                                             |                | 1,438                                 
|06/30/2006    |                | 596                                             |                | 1,536                                 
|09/30/2006    |                | 597                                             |                | 1,624                                 

---

|(1) | Average worldwide offshore rigs under contract calculated by Hydril using weekly data published by ODS-Petrodata Group.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | Average United States land rig count calculated by Hydril using weekly data published by Baker Hughes Incorporated.
|--- | -------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

SEPTEMBER 30, 2006 AND 2005

Revenue

Total revenue increased $24.3 million or 26%, to $117.3 million for the three months ended September 30, 2006 compared to $93.0 million for the three
months ended September 30, 2005. Our premium connection revenue increased $0.9 million, or 1%, to $63.8 million for the three months ended September 30, 2006 compared to $62.9 million for the prior year period. This increase was
primarily the result of higher demand in certain Eastern Hemisphere international markets which was partially offset by lower demand in Latin American markets and the U.S. market. Pressure control revenue increased $23.5 million, or 78%, to $53.5
million for the three months ended September 30, 2006 compared to $30.0 million for the same period in 2005. Pressure control capital equipment revenue increased 134% as higher levels of new and refurbished rig construction in the industry
increased demand for the type of equipment we manufacture. Approximately 62% of the capital equipment revenue increase was for capital equipment projects, which generally involve over $1 million in revenue and require over six months to
complete, and are accounted for on a percentage-of-completion basis. Pressure control aftermarket revenue increased 30% over the prior year period primarily due to higher worldwide offshore and U.S. land rig count activity, which increased the
consumption of spare parts used in the drilling process.



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Gross Profit

Gross profit increased $4.1 million to $45.4 million for the three months ended September 30, 2006 compared to $41.3 million for the prior year period. Gross profit for our premium connection segment decreased 11% from the prior year
quarter due primarily to lower plant utilization, which resulted in higher costs per unit in markets in which revenue declined, primarily Latin America and the U.S., and higher pass-through pipe sales in select international markets. Gross profit
for our pressure control segment increased 51% from the prior year period due primarily to higher plant production volumes, as a result of progress made on capital equipment projects, and higher demand and prices for aftermarket products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2006 were $17.7 million compared to $14.1 million for the prior year quarter. The increase over the prior year quarter was primarily due the
inclusion of stock option expense resulting from the adoption of FAS 123(R) (see further discussion of SFAS 123(R) under Recent Accounting Pronouncements) and other stock-based compensation expense, higher engineering expenses to support
increased levels of capital equipment sales and product testing, as well as increased agent commissions associated with higher international sales. As a percentage of revenue, selling, general, and administrative expenses were 15% for both the third
quarter of 2006 and 2005.

Operating Income

Operating income increased $0.6 million to $27.8 million for the three months ended September 30, 2006 compared to $27.2 million for the same period in 2005. Operating income for our premium connection segment decreased $4.3 million to
$18.7 million for the third quarter of 2006 from $23.0 million for the third quarter of 2005. Operating income for our pressure control segment increased $5.9 million to $14.5 million for the quarter ended September 30, 2006 compared to $8.6
million for the same period in 2005. Corporate and administrative expenses were $5.4 million for the three months ended September 30, 2006 compared to $4.4 million for the prior year period.

Other Income and Expense

Other expense for the three
months ended September 30, 2006 was $0.1 million compared to other income of $1.3 million for the three months ended September 30, 2005. The prior year quarter included a $2.2 million gain recorded from the sale of real estate not used in
operations as well as an increase in environmental reserves of $0.7 million on other non-operational real estate assets.

Provision for Income Taxes

Income tax expense was $10.2 million for the three months ended September 30, 2006, compared to $9.8 million for the three months
ended September 30, 2005. The effective tax rate for the three months ended September 30, 2006 was 34.1% as compared to 33.4% for the third quarter of 2005.



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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2006 AND 2005

Revenue

Total revenue increased $110.1 million or 42%, to $373.5 million for the nine months ended September 30, 2006 compared to $263.4
million for the nine months ended September 30, 2005. Our premium connection revenue increased $53.5 million, or 31%, to $226.8 million for the nine months ended September 30, 2006 compared to $173.3 million for the prior year period.
This increase was primarily the result of higher demand for our products worldwide, including a large amount of pipe purchased by us for threading and resale in certain international markets and in North America due to higher levels of deep
formation drilling activity. Pressure control revenue increased $56.6 million, or 63%, to $146.7 million for the nine months ended September 30, 2006 compared to $90.1 million for the same period in 2005. Pressure control capital
equipment revenue increased 114% primarily due to improved industry fundamentals resulting in increased drilling activity and higher levels of new and refurbished rig construction increased demand for the type of equipment we manufacture.
Approximately 71% of the revenue increase was for projects, which generally involve over $1 million in revenue and require over six months to complete, and are accounted for on a percentage-of-completion basis. Aftermarket pressure control
revenue increased 26% primarily due to higher worldwide offshore and U.S. total rig counts, resulting in increases in the consumption of spare parts in the drilling process.

Gross Profit

Gross profit increased $33.0 million to $150.2 million for the nine months ended
September 30, 2006 compared to $117.2 million for the prior year period. Gross profit for our premium connection segment increased 23% over the nine months ended September 30, 2005 due primarily to higher demand for our products
worldwide which led to higher plant utilization and higher pricing levels in select markets. Gross profit for our pressure control segment increased 37% from the prior year due primarily to higher plant production volumes, as a result of progress
made on pressure control capital equipment projects, and higher demand and prices for aftermarket products.

Selling, General and Administrative
Expenses

Selling, general, and administrative expenses for the nine months ended September 30, 2006 were $53.4 million compared to
$42.9 million for the prior year period. The increase over the prior year period was primarily due to the inclusion of stock option expense resulting from the adoption of FAS 123(R) (see further discussion of SFAS 123(R) under Recent Accounting
Pronouncements) and other stock-based compensation, higher engineering expenses to support increased levels of capital equipment sales and product testing, as well as higher agent commissions associated with higher international sales. As a
percentage of revenue, selling, general, and administrative expenses were 14% for the nine months ended September 30, 2006 compared to 16% for the prior year period.



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Operating Income

Operating income increased $22.5 million to $96.8 million for the nine months ended September 30, 2006 compared to $74.3 million for the same period in 2005. Operating income for our premium connection segment
increased $13.5 million to $74.8 million for the nine months ended September 30, 2006 from $61.3 million for the same period in 2005. Operating income for our pressure control segment increased $12.5 million to $38.5 million for the
nine months ended September 30, 2006 compared to $26.0 million for the same period in 2005. Corporate and administrative expenses were $16.4 million for the first nine months of 2006 compared to $13.0 million for the prior year
period.

Other Income and Expense

Other expense for the nine months ended September 30, 2006 was $0.3 million compared to other income of $1.1 million for the nine months ended September 30, 2005. The 2005 period included a $2.2 million gain recorded from the sale
of real estate not used in operations as well as an increase in environmental reserves of $0.7 million on non-operational real estate assets.

Provision
for Income Taxes

Income tax expense was $34.8 million for the nine months ended September 30, 2006, compared to $26.0 million
for the nine months ended September 30, 2005. The effective tax rate for the nine months ended September 30, 2006 was 34.0% as compared to 33.4% for the same period in 2005.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund
capital expenditures, fund new product development, provide additional working capital and to fund the repurchase of a portion of our common stock as discussed below. Our primary source of funds is cash flow from operations. In addition, we had
available cash, cash equivalents and investments of $189.0 million at September 30, 2006. At September 30, 2006, we had no outstanding debt and $12.3 million of outstanding letters of credit which were comprised primarily of performance
bonds related to customer orders in our backlog.

In March 2006, the Companys Board of Directors authorized the repurchase of up to
$100 million of the Companys common stock. At September 30, 2006, the Company had repurchased the full amount authorized. A total of 1,544,757 shares were repurchased for an aggregate price of approximately $100.0 million, including the
repurchase of 1,191,432 shares during the third quarter of 2006 for an aggregate price of approximately $75.0 million. All of the shares repurchased pursuant to the Board authorization through September 30, 2006, are held as treasury stock.

On November 9, the Board of Directors authorized the repurchase of an additional $150 million of the Companys common stock.
Subject to market considerations, the Company may repurchase additional shares in the open market or in privately negotiated transactions based on its ongoing capital requirements, expected cash flows and regulatory restraints. Repurchases are
expected to be funded with current cash, cash equivalents and short-term investments. Repurchases may be suspended at any time.



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We believe that cash from operations and existing cash, cash equivalents and investment balances will be
sufficient to meet anticipated cash requirements, including working capital needs, contractual obligations and planned capital expenditures, for at least the next 12 months. In the longer term, if we were to need additional cash, we anticipate that
we could enter into credit facilities and that we could also raise additional funds through issuing debt or equity securities.

Operating Activities

For the nine months ended September 30, 2006, cash provided by operating activities was $124.5 million which primarily
resulted from earnings and contractual cash payments of approximately $80.3 million received from customers on long-term capital equipment projects, which were partially offset by increases in inventories. For the nine months ended
September 30, 2005, cash provided by operating activities was $54.3 million primarily due to earnings and contractual cash payments received on long-term capital equipment projects, which was partially offset by higher working capital
requirements which included increases in inventories of approximately $19.1 million driven by higher demand in both of our segments.

Investing
Activities

Net cash provided by investing activities was $83.8 million for the nine months ended September 30, 2006 compared to
net cash used of $54.0 million for the nine months ended September 30, 2005. Cash provided by investing activities for the first nine months of 2006 was primarily from net proceeds from marketable securities (both held-to-maturity and
available-for-sale investments) of $107.2 million which was slightly offset by capital spending of $22.2 million. The investment of cash in 2005 included $40.0 million for net investments in marketable securities, capital spending of
$10.7 million and the purchase of a pressure control product line for $3.6 million.

Capital spending for the nine months ended
September 30, 2006 of $22.2 million included $11.6 million for our premium connection segment, $9.0 million for our pressure control segment and $1.6 million for general corporate purposes. These expenditures were primarily for capacity
additions at our pressure control plant in Houston, building a new facility for our premium connection manufacturing operations in Scotland, expansion of our premium connection manufacturing capacity in Mexico and equipment for our new pressure
control manufacturing plant in Mexico. Capital spending for the nine months ended September 30, 2005 of $10.7 million included $8.9 million for our premium connection segment and $1.5 million for our pressure control segment, in both cases
primarily to support manufacturing operations, and $0.3 million for general corporate purposes.

If current industry conditions continue,
we expect our total 2006 capital expenditures to be approximately $30 to $35 million, which includes a level of spending of approximately $8 to $10 million necessary to maintain our existing operations. The remaining expenditures are anticipated to
be used to continue to gradually increase our premium connection



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manufacturing capacity, acquire additional equipment for our new pressure control plant under construction in Mexico,
fund business investments in emerging international markets and for additional manufacturing capacity at our Houston pressure control plant.

Financing
Activities

Net cash used in financing activities was $93.7 million for the nine months ended September 30, 2006 which is
primarily due to the payment of $100.0 million for the repurchase of shares of the Companys common stock which was slightly offset by $4.0 million in net proceeds from the exercise of stock options and $2.1 million of excess tax
benefits from stock-based compensation. Net cash provided by financing activities for the nine months ended September 30, 2005 was $6.5 million, the majority of which was due to net proceeds from the exercise of stock options.

Prior to the adoption of SFAS 123(R), in accordance with previous accounting standards, we presented all tax benefits for deductions resulting from
the exercise of stock options and disqualifying dispositions under operating cash flow on our consolidated statement of cash flows. Beginning in 2006, in accordance with the requirements of SFAS 123(R), we are reporting the benefits of tax
deductions in excess of recognized compensation expense under financing activities.

Letters of Credit

The Companys banking institutions currently issue letters of credit on the Companys behalf based on its credit worthiness. At
September 30, 2006, there was approximately $12.3 million outstanding in letters of credit, which included $8.5 million of performance bonds related to customer orders in our backlog. In addition, the Company has agreed to guarantee
half of the total outstanding borrowings of our premium connection Indian joint venture, an unconsolidated entity of which we own 50%, up to a maximum of approximately $3.0 million by issuing irrevocable standby letters of credit. As of
September 30, 2006, the total amount of borrowings of the joint venture was approximately $4.1 million, of which approximately $2.1 million was subject to the Companys guarantee. The Company does not expect this guarantee
to have a material adverse effect on its financial condition or results of operations.

Backlog

The pressure control capital equipment backlog, which includes long-term projects and other capital equipment orders, was $289.2 million at
September 30, 2006, $156.7 million at December 31, 2005 and $61.2 million at September 30, 2005. The increase in the backlog, which began during the fourth quarter of 2005 and has continued to increase in each of the quarters since,
was the result of new long-term capital equipment project orders received, which are attributable to a significant rise in new rig construction and refurbishment worldwide.

The backlog of premium connection and pressure control aftermarket parts and service is not a meaningful measure of business prospects due to the quick
turnover of such orders and the majority of such orders are cancelable at will by the purchaser without penalty.

We recognize the revenue
and gross profit from pressure control long-term projects using the percentage-of-completion accounting method. As revenue is recognized under the



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percentage-of-completion method, the order value in backlog is reduced. We expect to recognize revenue from orders in our
backlog at September 30, 2006 over the next three years. It is possible for orders to be cancelled; however, in the event of cancellations all costs incurred would be billable to the customer.

Subsequent to September 30, 2006, the Company received purchase orders for an additional $154 million of deepwater blowout prevention systems, which will
be included in the backlog for the fourth quarter.

CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2005. See also Note 2, Stock-Based Compensation, in the Notes to the Unaudited Financial Statements in this Form 10-Q. We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the year. Actual results could differ from those estimates. The estimates in the areas we consider to be most critical in understanding the judgments that are involved in preparing our financial
statements and the uncertainties that could impact our results of operations, financial condition and cash flows are described under Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical
Accounting Estimates in our Annual Report on Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R). SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006. The purpose of SFAS No. 158 is to improve the overall financial
statement presentation of pension and other postretirement plans, but does not impact the determination of net periodic benefit cost or measurement of plan assets or obligations. SFAS 158 requires companies to recognize the over or under funded
status of the plan as an asset or liability as measured by the difference between the fair value of the plan assets and the benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a
component of accumulated other comprehensive income (loss). Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than as of the end of their fiscal year, however, this provision is not effective for companies
until fiscal years ending after December 15, 2008. The Company has a defined benefit pension plan covering substantially all of its U.S. employees. Effective December 31, 2001, this plan was frozen and no additional benefits have been
accrued under this plan since that date. We are currently assessing the impact of SFAS 158 on our consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair



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value in accounting principles generally accepted in the United States of America and expands disclosure about fair value
measurements. This pronouncement applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value. Accordingly, this statement does not require any new fair value measurement. This statement is
effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently assessing the impact of SFAS 157 on our consolidated financial position and results of operations.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108) regarding
the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The
interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after
November 15, 2006. We do not anticipate the adoption to have a material effect on the Companys previously issued financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are
currently assessing the impact of FIN 48 on our consolidated financial position and results of operations.

On January 1, 2006 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) issued by the Financial Accounting Standards Board (FASB) in December
2004. SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method on the grant date (with limited exceptions) and recognize such expense in the consolidated financial statements over the requisite
employee service period. Prior to January 1, 2006, under the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), the Company applied Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting for its stock option plans. Accordingly, prior to January 1, 2006, the Company did not recognize any stock-based compensation expense in its
income statement for stock options, as the exercise price was equal to the market price of the Companys stock on the date of grant. However, the Company did recognize stock-based compensation expense for its restricted stock and restricted
stock unit awards. Awards of restricted stock, (time-vesting) restricted stock units and performance-based restricted stock units made prior to, but not yet vested as of January 1, 2006, will continue to be expensed.

See Note 2, Stock-Based Compensation, in the Notes to the Unaudited Financial Statements in this Form 10-Q for additional stock-based compensation
disclosures.



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In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB statement No. 3. SFAS 154 replaces APB No. 20, Accounting Changes
and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements and provides guidance on the accounting and reporting of accounting changes and error corrections. The statement applies to all voluntary changes in
accounting principles as well as all changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006. The adoption of SFAS 154 did not have a material effect on the Companys results of operations or financial condition.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB 43, Chapter 4 (SFAS
151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Paragraph 5 of Accounting Research Bulletin (ARB) 43, Chapter 4 Inventory Pricing,
previously stated that . . . under certain circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current-period charges . . . SFAS 151
requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be
based on the normal capacity of the production facilities. We adopted SFAS No. 151 on January 1, 2006. The adoption of SFAS 151 did not have a material effect on the Companys results of operations or financial condition.

Part I, Item 3: Quantitative and Qualitative Disclosures About Market Risk

There have been no significant
changes since December 31, 2005 in the Companys exposure to market risk.

Part I, Item 4: Controls and Procedures

Hydrils Chief Executive Officer and Chief Financial Officer have
evaluated the Companys disclosure controls and procedures as of September 30, 2006 and they have concluded that these controls and procedures are effective. There were no changes in the Companys internal control over financial
reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Part II, Item 1A: Risk Factors

You should consider carefully the following risk factors and all other
information contained in this quarterly report on Form 10-Q and our Annual Report on Form 10-K for the year-ended December 31, 2005. Any of the following risks could impair our business, financial condition and operating results.



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A material or extended decline in expenditures by the oil and gas industry, due to a decline in oil
and gas prices or other economic factors, would reduce our revenue.

Demand for our products and services is substantially dependent on
the level of capital expenditures by the oil and gas industry for the exploration for and development of crude oil and natural gas reserves. In particular, demand for our premium connections and our aftermarket pressure control products and services
is driven by the level of worldwide drilling activity, especially drilling in harsh environments. A substantial or extended decline in drilling activity will adversely affect the demand for our products and services. Recent declines in the U.S.
natural gas price during 2006 may reduce the level of drilling in the U.S. for natural gas, and coupled with high inventory levels of our premium connections held by end-users and distributors, could decrease the demand for our products. About 90%
of our premium connection revenue in the U.S. is for wells drilling for natural gas. A decline in number of these wells being drilled, due to low commodity prices, would reduce demand for our premium connections in the U.S.

Demand for our pressure control capital equipment is directly affected by the number of drilling rigs being built or refurbished. As drilling rig
utilization and day rates have improved, drilling contractors have placed orders for new rigs and for refurbishment of existing rigs. As a result, we have recently experienced a significant increase in orders for our pressure control capital
equipment. However, the industry is cyclical and should oil and gas prices decline for an extended period or there be an over-supply of rigs following new construction, drilling rig utilization and day rates could decline. A decrease in utilization
and day rates could lower demand for our pressure control capital equipment and adversely affect revenue and operating income for our pressure control segment.

Worldwide drilling activity is generally highly sensitive to oil and gas prices and can be dependent on the industrys view of future oil and gas prices, which have been historically characterized by significant
volatility. Oil and gas prices are affected by numerous factors, including:



| |  |  | the level of worldwide oil and gas exploration and production activity;
| | - |  | -----------------------------------------------------------------------



| |  |  | worldwide demand for energy, which is affected by worldwide economic conditions;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the policies of the Organization of Petroleum Exporting Countries, or OPEC;
| | - |  | ---------------------------------------------------------------------------



| |  |  | significant decreases or increases in the production of oil or gas from countries due to war or civil unrest, such as in Iraq, Nigeria or Venezuela;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of producing oil and gas;
| | - |  | ----------------------------------



| |  |  | interest rates and the cost of capital;
| | - |  | ---------------------------------------



| |  |  | technological advances affecting hydrocarbon consumption, particularly oil and gas;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | environmental regulation;
| | - |  | -------------------------



| |  |  | level of oil and gas inventories in storage;
| | - |  | --------------------------------------------



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| |  |  | tax policies, including windfall profit taxes on oil and gas companies, which have recently been proposed in the United States Congress;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | extended disruptions of oil and gas drilling and production, refining or pipeline operations as a result of weather-related factors, such as hurricanes or tropical storms in the
Gulf of Mexico or other natural disasters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | policies of national governments; and
| | - |  | -------------------------------------



| |  |  | war, civil disturbances and political instability.
| | - |  | --------------------------------------------------

We
expect prices for oil and natural gas to continue to be volatile and affect the demand and pricing of our products and services. A material decline in oil or gas prices could materially adversely affect our business. In addition, recessions and
other adverse economic conditions can also cause declines in spending levels by the oil and gas industry, and thereby decrease our revenue and materially adversely affect our business.

We may lose money on fixed price contracts, which currently constitute a significant part of our business, and such contracts could cause our
quarterly revenue and earnings to fluctuate significantly.

Almost all of our pressure control projects, including all of our larger
engineered subsea control systems projects, are performed on a fixed-price basis. This means that we are responsible for all cost overruns, other than any resulting from change orders. Our costs and any gross profit realized on our fixed-price
contracts could vary from the estimated amounts on which these contracts were originally based. This may occur for various reasons, including:



| |  |  | changes in cost, estimates or expected production time;
| | - |  | -------------------------------------------------------



| |  |  | schedule delays caused by third party suppliers and subcontractors;
| | - |  | -------------------------------------------------------------------



| |  |  | unanticipated cost escalations from the time the order is received to the time of delivery, which can be up to three years later;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | engineering design changes;
| | - |  | ---------------------------



| |  |  | changes requested by customers; and
| | - |  | -----------------------------------



| |  |  | unexpected changes in the availability and cost of labor and material.
| | - |  | ----------------------------------------------------------------------

The variations and the risks inherent in engineered subsea control systems projects may result in reduced profitability or losses on our projects. Depending on the size of a project, variations from estimated contract
performance can have a significant impact on our operating results for any particular fiscal quarter or year. Our significant losses in 1997 through 1999 on fixed-price contracts to provide pressure control equipment and subsea control systems for
pressure control equipment are an example of the problems we can experience with fixed-price contracts. Our backlog of pressure control capital equipment has increased significantly over the past twelve months and consists mainly of fixed price
projects to be shipped over the next three years. Accordingly, the magnitude of our exposure to possible losses on fixed price contracts has increased along with the increase in the backlog.



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We may lose premium connection business to international and domestic competitors who produce their
own pipe, as well as other new entrants or lose business due to limitations on the availability of pipe for threading.

Our premium
connections are applied to steel tubulars produced by steel mills. In the United States and Canada and sometimes internationally, our premium connections are applied to steel tubulars purchased by a distributor from the steel mills. In international
markets distribution is more varied. We also purchase the tubulars from the steel mills, thread them and sell the complete product, or thread tubulars held by the steel mill, which the mill then sells, or thread tubulars owned by the end-user. In
any case, the price paid by the purchaser includes, but does not differentiate between, the costs of the steel pipe and the connection. Pricing of premium connections can be affected by steel prices, as the steel pipe is the largest component of the
overall price. We have no control over the availability or the price of the steel pipe. Prices for steel pipe have increased in recent periods due to higher worldwide demand for steel, and increased demand for oilfield tubulars, both of which in
turn have contributed to a tight supply of tubulars for oil and gas applications. If these conditions persist and demand for pipe increases, we or our distributors could have difficulty obtaining plain-end pipe for us to thread. If we or our
distributors are not able to obtain pipe for threading to satisfy end-user demand, our business would be adversely affected.

A number of
steel mills, especially internationally, are integrated steel producers, who both produce and thread steel tubulars. There are also some steel mills which market their own premium connections in North America. Accordingly, some of the steel mills
that supply the plain-end pipe that we thread also compete with our premium connections. Due to the current tight supply of steel and steel tubulars and low levels of inventory of tubular goods for oil and gas applications in the industry generally,
integrated producers may attempt to require that all or a greater portion of the pipe they produce bear their premium connections or change distribution channels or methods in a way that is adverse to us. Integrated steel producers also have more
pricing flexibility for premium connections since they control the production of both the steel tubulars to which the connections are applied, as well as the premium connections. This inherent pricing and supply control puts us at a competitive
disadvantage, and we could lose business to integrated steel producers even if plain end pipe is available and we may have a better product. The acquisition of U.S. tubular steel manufacturing capacity by a foreign integrated steel mill could result
in a loss of market share for Hydril. In addition, other domestic and foreign steel producers who do not currently manufacture tubulars with premium connections may in the future enter the premium connection business and compete with us.

Consolidation or loss of end-users of our products could adversely affect demand for our products and services and reduce our revenue.

Exploration and production company operators and drilling contractors have undergone substantial consolidation in the last few years.
Additional consolidation is probable. In addition, many oil and gas properties will be transferred over time to different potential customers.



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Consolidation results in fewer end-users for our products. In addition, merger activity among both major
and independent oil and gas companies also affects exploration, development and production activity, as these consolidated companies attempt to increase efficiency and reduce costs. Generally, only the more promising exploration and development
projects from each merged entity are likely to be pursued, which may result in overall lower post-merger exploration and development budgets. Moreover, some end-users are not as risk-averse and, as such, do not use as many premium products in
drilling deep formation wells.

Consolidation among drilling contractors could result in the combined contractor standardizing its
equipment preferences in favor of a competitors products and lead to the loss of a customer. The capital equipment portion of our pressure control segment is heavily dependent on our offshore drilling contractor customers, and the loss of one
of these customers through consolidation could have a material effect on our potential future capital equipment sales.

We are subject to
the usual risks associated with having a limited number of customers and end-users. The end-users of our products, who are not always our direct customers, are primarily international and domestic independent, major and state-owned oil and gas
companies and drilling contractors. During 2005, we sold products to and services to approximately 1,071 customers. We estimate that for 2005, Petroleos de Venezuela S.A. (PdVSA), the state-owned oil and gas company of Venezuela, through direct and
indirect sales, represented 13% of our consolidated revenue; and that Petroleos Mexicanos (Pemex), the state-owned oil and gas company of Mexico, through direct and indirect sales, represented 11% of our consolidated revenue. In 2005, our two
largest direct premium connection customers accounted for 20% and 14% of segment sales, and our ten largest direct premium connection customers accounted for 70% of total segment sales. In 2005, our two largest direct pressure control customers
accounted for 14% and 11% of segment sales and our ten largest direct pressure control customers accounted for 56% of segment sales.

The
loss of one or more of our significant customers or end-users, a reduction in exploration and development budgets as a result of industry consolidation or other reasons or a transfer of deep formation drilling prospects to end-users that do not rely
as heavily on premium products could adversely affect demand for our products and services and reduce our revenue.

If we are unable to
attract and retain skilled labor, the results of our manufacturing and services activities will be adversely affected.

Our ability to
operate profitably and expand our operations depends in part on our ability to attract and retain skilled manufacturing workers, equipment operators, engineers and other technical personnel. Demand for these workers in the Houston area is currently
high and the supply is limited, particularly in the case of skilled and experienced engineers and machinists. Because of the cyclical nature of our industry, many qualified workers choose to work in other industries where they believe lay-offs as a
result of cyclical downturns are less likely. As a result, our growth may be limited by the scarcity of skilled labor. Even if we are able to attract and retain employees, the intense competition for them, especially when our industry is in the top
of its cycle, may increase our compensation costs. Additionally, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the rates of wages we must pay, or both. If our
compensation costs increase or we cannot attract and retain skilled labor, the immediate effect on us would be a reduction in our profits and the extended effect would be diminishment of our production capacity and profitability and impairment of
any growth potential. We have recently experienced tightening in the relevant labor markets, and if that trend continues, it may have an adverse affect on our results of operations and potential for growth.

Our quarterly sales and earnings may vary significantly, which could cause our stock price to fluctuate.

Fluctuations in quarterly revenue and earnings could adversely affect the trading price of our common stock. Our quarterly revenue and earnings may vary
significantly from quarter to quarter depending upon:



| |  |  | the level of drilling activity worldwide, as well as the particular geographic focus of the activity;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the variability of customer orders, which are particularly unpredictable in international markets;
| | - |  | --------------------------------------------------------------------------------------------------



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| |  |  | the levels of inventories of our products held by our end-users and our distributors, which has grown in some areas during 2006;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the mix of our products sold and the margins on those products;
| | - |  | ---------------------------------------------------------------



| |  |  | new products offered and sold by us or our competitors;
| | - |  | -------------------------------------------------------



| |  |  | weather conditions or other natural disasters that can affect our operations or our customers operations, such as Hurricanes Katrina, Rita and Stan in 2005, which disrupted
operations at our Gulf Coast facilities, in particular at our Westwego, Louisiana facility, as well as the operations of our customers in the region;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in commodity prices and currency exchange rates, which in some cases affect the costs and prices for our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | pipe costs and their impact on contract prices and the level of our sales that include the pipe, which bears a low margin and can vary widely from quarter to quarter
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in the delivery or other limitations on the availability of plain-end pipe from steel mills for threading by us for our customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of long-term capital equipment project orders which varies with the level of new rig construction and refurbishment activity in the industry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in drilling and exploration plans which can be particularly volatile in international markets; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | delays in the delivery of finished products to customers due to limitations on the availability of marine transportation, particularly internationally.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, our fixed costs cause our margins to decrease when demand is low and manufacturing capacity is underutilized.

The level and pricing of tubular goods imported into the United States and Canada could adversely affect demand for our products and our results of
operations.

The level of imports of tubular goods, which has increased in the last several years, affects the domestic tubular goods
market. High levels of imports reduce the volume sold by domestic producers and tend to reduce their selling prices, both of which could have an adverse impact on our business. We believe that United States import levels are affected by, among other
things:



| |  |  | United States and worldwide demand for tubular goods;
| | - |  | -----------------------------------------------------



| |  |  | the trade practices of and government subsidies to foreign producers; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the presence or absence of antidumping and countervailing duty orders.
| | - |  | ----------------------------------------------------------------------

In many cases, foreign producers of tubular goods have been found by the United States government to have sold their products, which may include premium connections, for export to the United States at prices that are
lower than the cost of production or their prices in their home market or a major third-country market, a practice commonly referred to as dumping.



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If not constrained by U.S. antidumping duty orders and countervailing duty orders, which impose duties on imported
tubulars to offset dumping and subsidies provided by foreign governments, this practice allows foreign producers to capture sales and market share from domestic producers. Duty orders normally reduce the level of imported goods and result in higher
prices in the United States market.

Duty orders may be modified or revoked as a result of administrative reviews conducted at the request
of a foreign producer or other party. In addition, antidumping and countervailing duty orders may be revoked as a result of periodic sunset reviews. Under the sunset review procedure, an order must be revoked after five years unless the
United States Department of Commerce and the International Trade Commission determine that dumping is likely to continue or recur and that material injury to the domestic industry is likely to continue or recur. Antidumping duty orders currently
cover imports of tubulars from Argentina, Italy, Japan, Korea and Mexico, and a countervailing duty order currently covers imports from Italy. Some of the foreign steel mills whose sales in the U.S. are currently constrained by these orders and
duties have their own premium connection products and are significant competitors of ours, particularly outside of the U.S. where they are not subject to such orders. In addition, these steel mills have the benefit of the competitive advantages
discussed above under We may lose premium connection business to international and domestic competitors who produce their own pipe, as well as other new entrants or lose business due to limitations on the availability of pipe for
threading. On June 1, 2006, the International Trade Commission (ITC) initiated five-year sunset reviews concerning the countervailing duty order on oil country tubular goods from Italy and the antidumping orders on oil country
tubular goods from Argentina, Italy, Japan, Korea and Mexico. On September 5, 2006, the ITC decided to conduct full sunset reviews of these orders, and as such, the review process is expected to be completed by June 2007. If the orders covering
imports from these countries are revoked in full or in part or the duty rates lowered, we could be exposed to increased competition in the U.S. from imports that could reduce our sales and market share or force us to lower prices. Tubulars produced
by domestic steel mills and threaded by us may not be able to economically compete with tubulars manufactured and threaded at steel mills outside the U.S.

We rely on a few distributors for sales of our premium connections in the United States and Canada; a loss of one or more of our distributors or a change in the method of distribution could adversely affect our
ability to sell our products.

There are a limited number of distributors who buy steel tubulars, contract with us to thread the
tubulars and sell completed tubulars with our premium connections. In 2005, our nine distributors accounted for 73% of our premium connection sales in the United States and Canada.

In the United States, tubular distributors have combined on a rapid basis in recent years resulting in fewer distribution alternatives for our products.
In 1999, four distributors, one of which distributed our premium connections, combined to become one of the largest distributors of tubulars in the United States, and the combined company no longer distributes our products. Because of the limited
number of distributors, we have few alternatives if we lose a distributor. Identifying and utilizing additional or replacement distributors may not be accomplished



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quickly and could involve significant additional costs. Even if we find replacement distributors, the terms of new
distribution agreements may not be favorable to us. In addition, distributors may not be as well capitalized as our end-users and may present a higher credit risk.

We cannot assure you that the current distribution system for premium connections will continue. For example, products may in the future be sold directly by tubular manufacturers to end-users or through other
distribution channels such as the internet. If channels or methods of distribution change, many of our competitors may be better positioned to take advantage of those changes than we are.

Intense competition in our industry could result in reduced profitability and loss of market share for us.

Contracts for our products and services are generally awarded on a competitive basis, and competition is intense. The most important factors considered
by our customers in awarding contracts include:



| |  |  | availability and capabilities of the equipment;
| | - |  | -----------------------------------------------



| |  |  | ability to meet the customers delivery schedule;
| | - |  | -------------------------------------------------



| |  |  | price and indexes affecting price;
| | - |  | ----------------------------------



| |  |  | pipe costs and their impact on contract prices;
| | - |  | -----------------------------------------------



| |  |  | reputation;
| | - |  | -----------



| |  |  | experience;
| | - |  | -----------



| |  |  | safety record; and
| | - |  | ------------------



| |  |  | technology.
| | - |  | -----------

Many of our major competitors are
diversified multinational companies that are larger and have substantially greater financial resources, larger operating staffs and greater budgets for marketing and research and development than we do. They may be better able to compete in making
equipment available faster and more efficiently, meeting delivery schedules or reducing prices. In addition, two or more of our major competitors could consolidate producing an even larger company. Also our competitors may acquire product lines or
consolidate with another company in the oilfield services and equipment industry, and as a result be able to offer a more complete package of drilling equipment and services rather than providing only individual components. For example, in March
2005 National Oilwell, a manufacturer and supplier of oilfield equipment, systems and services that has historically purchased Hydril pressure control equipment, merged with Varco International, a manufacturer of pressure control equipment and one
of our primary competitors. As a result of any of the foregoing reasons, we could lose customers and market share to those competitors. These companies may also be in a better position to endure downturns in the oil and gas industry.

We do not do business in as many countries as some of our larger multinational competitors and in some cases even where we do business, we do not have as
significant a



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presence. Our lack of geographic diversity and penetration may have a material adverse affect on our results of
operations and competitive position. Spending on exploration and production is typically spread unevenly between various regions with changes in geographic spending patterns arising as discoveries are made, the price of oil and gas changes,
political changes take place or other factors occur that make drilling more or less attractive in a given geographic area. As a result, even when international rig counts and drilling activity increase overall, if the increased activity is not in
countries in which we have a strong presence, we may not experience any increase in business and may lose market share.

Moreover, some of
our competitors with greater financial resources and multinational presence have relocated manufacturing operations to countries where they have substantially lower labor costs and lower general overhead costs. The relocation by competitors of
manufacturing operations to low cost environments may continue in the future. As a result, our competitors may have lower costs than we do and be able to sell their products at prices significantly below ours.

Finally, demand for pressure control capital equipment is currently increasing due to the number of recently announced contracts to build new drilling
rigs or refurbish existing rigs. As a result, manufacturing capacity in the industry for blowout prevention equipment is being consumed at a faster rate than any of the previous five years. If demand for our products continues to increase, at some
point in the future it is possible that our capacity could be maximized. If our capacity is maximized and another supplier, who is much larger than us, has capacity available to produce the equipment in the time frame desired by our customer, we
could lose orders.



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Our international operations may experience severe interruptions due to political, economic and other
risks.

In 2005, approximately 69% of our total revenue was derived from services or equipment ultimately provided or delivered to
end-users outside the United States, and approximately 41% of our revenue was derived from products which were produced and used outside of the United States. We are, therefore, significantly exposed to the risks customarily attendant to
international operations and investments in foreign countries.

These risks include:



| |  |  | political instability, civil disturbances, war and terrorism;
| | - |  | -------------------------------------------------------------



| |  |  | nationalization, expropriation, and nullification of contracts;
| | - |  | ---------------------------------------------------------------



| |  |  | changes in regulations and labor practices;
| | - |  | -------------------------------------------



| |  |  | changes in currency exchange rates and potential devaluations;
| | - |  | --------------------------------------------------------------



| |  |  | changes in currency restrictions which could limit the repatriations of profits or capital;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | restrictive actions by local governments;
| | - |  | -----------------------------------------



| |  |  | seizure of plant and equipment; and
| | - |  | -----------------------------------



| |  |  | changes in foreign tax laws.
| | - |  | ----------------------------

An interruption of our
international operations could reduce our earnings or adversely affect the value of our foreign assets. The occurrence of any of these risks could also have an adverse effect on demand for our products and services or our ability to provide them. We
have manufacturing facilities in Warri, Nigeria and in Batam, Indonesia and a portion of our revenue is from sales to customers in these countries and surrounding areas. In addition, a portion of our revenue is from sales to customers in Venezuela.
These countries in recent history have experienced civil disturbances and violence, which have disrupted oil and gas exploration and production operations located there as well as day-to-day operations and oversight of our business from time to
time. These disruptions have affected our operations and resulted in lower demand for our premium connection products and services and, accordingly have had an adverse affect on our results of operations in previous periods and may do so in the
future.

The occurrence or threat of terrorist attacks could have an adverse affect on our results and growth prospects, as well as on
our ability to access capital and obtain adequate insurance.

The occurrence or threat of future terrorist attacks could adversely
affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in energy consumption, which could cause a decrease in spending by oil and gas companies for exploration and
development. In addition, these risks could trigger increased volatility in prices for crude oil and natural gas which could also adversely affect spending by oil and gas companies. A decrease in spending for any reason could adversely affect the
markets for our products and thereby adversely affect our revenue and margins and



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limit our future growth prospects. Moreover, these risks could cause increased instability in the financial and insurance
markets and adversely affect our ability to access capital and to obtain insurance coverage that we consider adequate or are otherwise required by our contracts with third parties.

High fixed costs in the pressure control industry could exacerbate the level of price competition for our products, adversely affecting our business
and revenue.

Demand in the pressure control industry is currently high and utilization of capacity is increasing. Historically,
however, there has been overcapacity in the pressure control equipment industry. When oil and gas prices fall, cash flows of our customers are reduced, leading to lower levels of expenditures and reduced demand for pressure control equipment. In
addition, adverse economic conditions can reduce demand for oil and gas, which in turn could decrease demand for our pressure control products. Under these conditions, the overcapacity causes increased price competition in the sale of pressure
control products and aftermarket services as competitors seek to capture the reduced business to cover their high fixed costs and avoid the idling of manufacturing facilities. Because we have multiple facilities that produce different types of
pressure control products, it is even more difficult for us to reduce our fixed costs since to do so we might have to shut down more than one plant. During and after periods of increasing oil and gas prices when sales of pressure control products
may be increasing, the overcapacity in the industry will tend to keep prices for the sale of pressure control products lower than if overcapacity were not a factor. As a result, when oil and gas prices are low, or are increasing from low levels
because of increased demand, our business and revenue may be adversely affected because of either reduced sales volume or sales at lower prices or both.

If we do not develop new technologies and products that are commercially successful, our revenue may decline or we may be required to write-off any capitalized investment.

The markets for premium connections and pressure control products and services are characterized by continual technological developments. As a result,
substantial improvements in the scope and quality of product function and performance can occur over a short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our
business and revenue may be adversely affected. Our future ability to develop new products depends on our ability to:



| |  |  | design and commercially produce products that meet the needs of our customers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | successfully market new products; and
| | - |  | -------------------------------------



| |  |  | obtain and maintain patent protection.
| | - |  | --------------------------------------

We may encounter
resource constraints, technical issues, or other difficulties that could delay introduction of new products and services in the future. Our competitors may introduce new products or obtain patents before we do and achieve a competitive advantage.
Additionally, the time and expense invested in product development may not result in commercial applications and provide revenue.



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For example, from time to time, we have incurred significant amounts in the development of new
technologies which were not successful for various commercial or technical reasons. If we are unable to successfully implement technological or R&D type activities, our growth prospects may be reduced and the level of our future revenue may be
materially and adversely affected. In addition, we would be required to write-off any capitalized investment in a product that is not a commercial success and does not have an alternative use. Moreover, we may experience operating losses after new
products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.

Limitations on our ability to protect our intellectual property rights could cause a loss in revenue and any competitive advantage we hold.

Some of our products and the processes we use to produce them have been granted United States and international patent protection, or have patent applications pending. Nevertheless, patents may not be granted from our
applications and, if patents are issued, the claims allowed may not be sufficient to protect our technology. If our patents are not enforceable, our business may be adversely affected. In addition, if any of our products infringe patents held by
others, our financial results may be adversely affected. Our competitors may be able to independently develop technology that is similar to ours without infringing on our patents. The latter is especially true internationally where the protection of
intellectual property rights may not be as effective. In addition, obtaining and maintaining intellectual property protection internationally may be significantly more expensive than doing so domestically. We may have to spend substantial time and
money defending our patents. After our patents expire, our competitors will not be legally constrained from developing products substantially similar to ours.

The loss of any member of our senior management and other key employees may adversely affect our results of operations.

Our success depends heavily on the continued services of our senior management and other key employees. Our senior management consists of a small number of individuals relative to other comparable or larger companies.
These individuals are Christopher T. Seaver, our President and Chief Executive Officer, Charles E. Jones, our Executive Vice President and Chief Operating Officer, Neil G. Russell, our Senior Vice President-Premium Connections and Senior Vice
President-Business Development, Chuck Chauviere, our Vice President-Pressure Control, and Chris D. North, our Chief Financial Officer. These individuals, as well as other key employees, possess sales and marketing, engineering, manufacturing,
financial and administrative skills that are critical to the operation of our business. We generally do not have employment or non-competition agreements with members of our senior management or other key employees. If we lose or suffer an extended
interruption in the services of one or more of our senior officers or other key employees, our results of operations may be adversely affected. Moreover, we may not be able to attract and retain qualified personnel to succeed members of our senior
management and other key employees.



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We could be subject to substantial liability claims, which would adversely affect our results and
financial condition.

Most of our products are used in hazardous drilling and production applications where an accident or a failure of
a product can have catastrophic consequences. For example, if one of our blowout preventers fails, the oil and gases from the well may ignite or the equipment and tubulars in the well may be suddenly propelled out of the well, potentially resulting
in injury or death of personnel, destruction of drilling equipment, environmental damage and suspension of operations. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the
assertion of potentially large claims against us.

While we maintain insurance coverage against these risks, this insurance may not protect
us against liability for some kinds of events, including specified events involving pollution, or against losses resulting from business interruption. Our insurance may not be adequate in risk coverage or policy limits to cover all losses or
liabilities that we may incur. Moreover, we may not be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any significant claims made under our policies will likely cause our premiums to
increase. Any future damages caused by our products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, could reduce our earnings and our cash available for operations.

Changes in regulation or environmental compliance costs and liabilities could have a material adverse effect on our results and financial
condition.

Our business is affected by changes in public policy, federal, state and local laws and regulations relating to the energy
industry. The adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations by limiting available drilling and other
opportunities in the oil and gas exploration and production industry. Our operations and properties are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air
emissions, water discharges, waste management and workplace safety. Many of our operations require permits that may be revoked or modified, that we are required to renew from time to time. Failure to comply with such laws, regulations or permits can
result in substantial fines and criminal sanctions, or require us to purchase costly pollution control equipment or implement operational changes or improvements. We incur, and expect to continue to incur, substantial capital and operating costs to
comply with environmental laws and regulations.

We could become subject to claims related to the release of hazardous substances which
could adversely affect our results and financial condition.

We use and generate hazardous substances and wastes in our manufacturing
operations. In addition, many of our current and former properties are or have been used for industrial purposes for many years. Accordingly, we could become subject to potentially material liabilities relating to the investigation and cleanup of
contaminated properties, including property owned or leased by us now or in the past or third party sites to which we



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sent waste for disposal. We also could become subject to claims alleging personal injury or property damage as the result
of exposures to, or releases of, hazardous substances, including naturally occurring radioactive materials or technologically enhanced radioactive materials, which may be encountered in drilling for oil and gas. In addition, stricter enforcement of
existing laws and regulations, the enactment of new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased
liabilities that could reduce our earnings and our cash available for operations. See Note 6 to our consolidated financial statements included elsewhere in this report for more information regarding environmental contingencies.

Liability to customers under warranties may materially and adversely affect our earnings.

We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our pressure control equipment and
premium connections are often deployed in harsh environments including subsea applications. Failure of this equipment or our premium connections to operate properly or to meet specifications may increase our costs by requiring additional engineering
resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we expect to continue to receive them in the future. To the extent that we incur substantial
warranty claims in any period, our reputation, our ability to obtain future business and our earnings could be materially and adversely affected.

Excess cash is invested in marketable securities which may subject us to potential losses.

We invest excess cash in
various financial instruments and money market mutual funds rated as the highest quality by nationally recognized rating agencies. However, changes in the financial markets, including interest rates, as well as the performance of the issuers can
affect the market value of our short-term investments.



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Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Common Stock

The following table details our repurchases of shares of our common stock for the three months ended September 30, 2006:



|                       |  |                                  |     |  |                         |       |                                                                                  |           |                                                                                                  |   |            |    
|---------------------- |  | -------------------------------- | --- |  | ----------------------- | ----- | -------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------ | - | ---------- | ---
|Period                 |  | Total Number of Shares Purchased |     |  | Average Price Per Share |       | Total Number of Shares Purchased as Part of
Publicly Announced Plans or Programs |           | Maximum Approximate Dollar Value of Shares that May Yet
be Purchased Under the Plans or Programs |  
|July 1 - 31, 2006      |  | 109,336                          | (1) |  | $                       | 73.17 |                                                                                  | 109,336   |                                                                                                  | $ | 67 million | (2)
|August 1 - 31, 2006    |  | 372,575                          | (1) |  | $                       | 69.78 |                                                                                  | 372,575   |                                                                                                  | $ | 41 million | (2)
|September 1 - 30, 2006 |  | 709,521                          | (1) |  | $                       | 57.79 |                                                                                  | 709,521   |                                                                                                  |   |           |    
|Total                  |  | 1,191,432                        | (1) |  | $                       | 62.95 |                                                                                  | 1,191,432 |                                                                                                  |   |            |    

---

|(1) | During the quarter ended September 2006, the Company repurchased a total of 1,191,432 shares at an average price, including commission, of $62.95 per share, pursuant to the
repurchase authorization of the Board of Directors discussed below in footnote (2).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On March 7, 2006, the Company announced that the Board of Directors had authorized the repurchase of up to $100 million of the Companys common stock over a twelve month
period. At September 30, 2006, the Company had repurchased the full amount authorized.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On November 9, the Board of
Directors authorized the repurchase of an additional $150 million of the Companys common stock. Subject to market considerations, the Company may repurchase additional shares in the open market or in privately negotiated transactions based on
its ongoing capital requirements, expected cash flows and regulatory restraints. Repurchases are expected to be funded with current cash, cash equivalents and short-term investments. Repurchases may be suspended at any time.

Part II, Item 6: Exhibits



|          |  |                                                                                                                                                                                                                 
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits: |  |                                                                                                                                                                                                                 
|31.1     |  | Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                             
|          | 
|31.2     |  | Certification by Chris D. North, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                    
|          | 
|32.1     |  | Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code).
|          | 
|32.2     |  | Certification by Chris D. North, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).       



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                |  |                                                                    
|---------------------- |  | -------------- |  | -------------------------------------------------------------------
|                       |  | HYDRIL COMPANY
|                       |  |               
|Date: November 9, 2006 |  | By:            |  | /s/ Chris D. North                                                 
|                       |  |                |  | Chris D. North                                                     
|                       |  |                |  | Chief Financial Officer                                            
|                       |  |                |  | (Authorized officer and principal accounting and financial officer)



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